Those anticipating a Turkish buyout market of substance will have taken encouragement from the BC Partners-led acquisition of Migros in February, says Toby Lewis.

Conversations with emerging markets professionals about the latest up-and-coming buyout destinations frequently reference Turkey as a key market to watch. In February this promise began to be fulfilled with the country playing host to the largest buyout in Europe since credit markets seized up. A consortium led by European buyout firm BC Partners, alongside local mid-market outfit Turkven Private Equity and DeA Capital, which is owned by Italian publishing company De Agostini, acquired a 51 percent stake in Turkish retailer Migros Türk for YTL3.9 billion ($3.25 billion; €2.2 billion) from Turkish conglomerate Koç Holding. The group fended off hot competition from US buyout firms The Blackstone Group and Kohlberg Kravis Roberts.

Arguably at least as interesting as the size of the deal is that the Turkish lira-denominated transaction was financed by domestic banks Garanti Bank, Is Bank and Vakifbank. Market sources say Turkish banks have not been affected by problems in the sub-prime market and have been strengthened by a spate of consolidation, such as the $3.1 billion acquisition by US bank Citi of a 20 percent stake in Akbank. So while deals similar in size to Migros have failed to get off the ground in Western Europe and the US, the liquid Turkish banks have hoisted up an “open for business” sign. The decision to conduct the transaction in the local currency also indicates a leap of faith that economic reforms the country has been undergoing are here to stay.

Nikos Stathopoulos, who led the transaction for BC Partners, says: “The banks were very familiar with the company and willing to lend. These banks have a lot of liquidity as they were not victims of the credit crunch. They have about 70 million people with deposits leading to ample liquidity – and they are prepared to invest.”

The deal will be followed by a tender offer for the remaining shares in the company. Due to one of the peculiarities of Turkish legislation there is no squeeze-out provision, and so the company may need to remain listed on the Turkish Stock Exchange, Stathopoulos says.

While the possible development of a large buyout market in the country has hit the headlines via the Migros deal, it is still early days for the asset class in Turkey. Deal volume in 2006 and 2007 was $1.9 billion and $1.7 billion across seven and nine deals respectively, according to data provider Dealogic. The Migros deal has almost topped this combined total on its own. Previously, the buyout record in the country was held by Kohlberg Kravis Roberts, which bought transport company UN RO-RO in October last year for €910 million ($1.3 billion). This was the first $1 billion-plus transaction, trumping the TPG-led buyout of drinks company Mey Icki for $900 million in May 2006.

The Mey Içki and Migros buyouts were backed by domestic Turkish buyout firms Turkven and Actera respectively, which have recently set themselves apart from local competition with two $400 million-plus closes for their latest funds in the final months of last year. Stathopoulos says: “It was important to have a local partner because we don't have a local presence and we did the deal from offices in the UK, Milan and Paris. If we hadn't had them, it may have been a different story.”

These funds are soon to be joined by alternative asset manager AccessTurkey Capital Group, which is raising both its first buyout fund and seeking venture funding. The firm, run by founder Mustafa Say, has a venture arm iLab Ventures, which has completed five deals, including buying web retailer GittiGidiyor.com in March 2006. Online retailer eBay subsequently partnered with AccessTurkey in September 2007 as a joint owner of the website. The firm has also done one larger buyout, acquiring automotive parts business Olguncelik in January 2006 for an undisclosed sum.

AccessTurkey and Turkven generally do mid-market deals. Frank RoccoGrande, a partner at AccessTurkey, says: “Turkven going after large-cap investments has surprised a lot of people, although we all have carve-outs in our funds that allow us to go after larger transactions. In the mid-market, there is also plenty of acquisition financing and the terms are still very attractive.”

AccessTurkey is particularly interested in the forthcoming privatisation of Turkey's energy sector. The country is likely to become a key deal destination in the coming years as the government looks to privatise various assets in areas such as healthcare, education and energy, RoccoGrande says. State tobacco company Tekel is currently being privatised. In the first stage of the auction process this month, the company attracted bids of around $1.3 billion from bidders such as Cinven and Citi Venture Capital International in partnership with Turkish holding company Dogan.

Both geographically and symbolically, Turkey links Europe with Asia. Since the time of the Ancient Greeks, it has been as a country where Western civilisation has traded and clashed with powers from the East. The latest talking point in the country's complex interaction between the two continents is its impending accession to the European Union, scheduled to begin at the earliest in 2013. This has been a key driver of ongoing economic reforms in the country, which have led indirectly to the foundations of a private equity market being laid in the region. Not only is leverage available to do deals on the back of the consolidation of the banking sector, but the government has taken significant steps to liberalise the economy and hence provide many of the opportunities being pursued by investors in the country.

We view Turkey as one of the few virgin markets which is significantly underpenetrated and we still think the amount of activity there is relatively low in ratio in comparison to other markets in the MENASA region

Abra Mir

While anticipating the potential that EU membership offers, Turkey is starting to take some business away from states which have already joined the European block. “Manufacturing in Eastern Europe is starting to move to Turkey due to the lower cost of labour and this is leading to an increase in foreign direct investment in the economy,” RoccoGrande says.

While large Western buyout firms are expressing an interest in Turkey, it is also drawing the attention of buyout vehicles based in the oil-rich states of the Middle East keen to invest their riches across the region. For example, Dubai-based Abraaj Capital bought Acibadem Healthcare Services and its sister insurance company for an undisclosed sum in January.

Meanwhile, mid-market Dubai private equity firm NBD Sana is putting the finishing touches to a $500 million fund, which will invest across the Middle East, North Africa and South Asia. Abrar Mir, managing partner of NBD Sana, says: “We view Turkey as one of the few virgin markets which is significantly underpenetrated and we still think the amount of activity there is relatively low in ratio in comparison to other markets in the MENASA region.” Mir says his firm is close to completion on an undisclosed deal in the country to seal the first investment from NBD Sana's fund. He envisages many more deals in Turkey in future.

The prospects of the asset class in the country seem to be on the up. This is not only because of the example provided by Migros. It is also a product of a banking sector sheltered from the credit crunch and a privatisation programme launched by a government intent on securing EU membership. These developments should continue to provide plenty of opportunities for GPs descending on the country from East and West.