Credit to Turkey

Ratings agency Standard and Poor’s said on 20 September that it was upgrading Turkey’s local currency credit rating from BB+ to BBB-, pushing Turkish debt up into investment-grade territory again for the first time in more than 15 years.

Private Equity International happened to be in Turkey at PEI’s third annual Turkey Forum on the day the news was announced, so we were able to see the reaction first-hand. The move wasn’t entirely unexpected, but nonetheless, the positivity it generated was palpable; this is clearly good news for a private equity market that seems to be enjoying some happy headwinds.

So why now? S&P cited “continuing improvements” in Turkey’s financial sector, along with the “deepening of local markets” – all of which, of course, is vital for private equity in the country to flourish. But it’s also a reflection of Turkey’s economic strengths, particularly relative to the weakness of the neighbouring eurozone. Turkey grew at an annualised rate of 10.2 percent in the second quarter – faster even than China. It has a large, young population – two-thirds of its 73 million people are under 30 – and a burgeoning middle class.

It’s unlikely that Turkey can sustain this kind of growth; and opinion was divided about how painful the slowdown will be. But these are still attractive fundamentals for private equity, which explains why interest in the region is growing all the time. At the PEI forum, local firms like Turkven and Actera Group rubbed shoulders with regional players like Abraaj Capital NBGI Private Equity and global funds like Kohlberg Kravis Roberts. All told, some 17 firms are now represented in Turkey. Deals are getting bigger, and BC Partners’ partial realisation of Migros (the supermarket chain it owns along with Turkven and DeA) earlier this year was a positive sign for exits.

So will the upgrade be “transformational”, as one delegate suggested to PEI? At a technical level, it will mean that certain funds that were previously unable to invest in Turkish sovereign debt will now be able to do so – which should have the effect of boosting liquidity in the country, further strengthening the financial infrastructure. This ought to make it easier for private equity firms to do deals. The downside, some GPs worry, is that it could lead to even more unrealistic price expectations, in what many participants already characterise as a sellers’ market.

Either way, it should improve the perception of Turkey overseas – and that should help attract investment. When fund of fund managers go to London or Washington or New York to make their case for backing a Turkish fund, their job should now be that little bit easier.