The Turkish M&A market never lacked surprises or activity and has always been one to watch, even at times when other markets were navigating doldrums. The rest of 2022 and 2023 are not likely to be exceptions and there is certainly room to be optimistic in terms of increased activity.
A number of factors, both domestic and international, play into Turkey’s hand and fuel the fires of optimism. The war in Ukraine and the ever-increasing number of sanctions against Russia and China appear to be helping Turkey recapture its position as the close-to-home manufacturing hub for European investors. Consequently, we see an increasing number of European manufacturers, in particular, those with a buy and build strategy, looking into Turkish manufacturing businesses. The lower cost of labor, a central location offering logistics advantages, and a gateway to otherwise not accessible markets as well as the size of its domestic market close to 85 million people make mouthwatering returns possible.
Venture capitalists are probably having the best time of their lives in the Turkish markets as activity is buoyant. Capital is not scarce as numerous funds have been raised recently and are looking to invest. Various legislative changes and incentives for technology development contribute to the investment fauna. Turkish tech entrepreneurs are becoming more and more global-minded and US or UK flips followed by Series A deals are common currency. As a consequence of the foregoing, Turkey ranks first in Europe – ahead of the UK and Norway – in terms of investments in the gaming industry, with Turkish startups receiving investments in the amount of USD 333 million in the first six months of 2022.
Turkey’s energy deficit is by now a known phenomenon and keeps fueling both local and foreign investors’ appetite for investing in energy projects, ranging from green energy to classic power plants. Joint ventures are a natural consequence of the foregoing, as Turkish players seek to partner with foreign investors either for financing or technology and know-how transfer reasons.
However, for anyone who has been keeping an eye on Turkey, it is never all sunshine and roses. The war in Ukraine is as much a risk factor as an opportunity. The elections in 2023 may be a concern for some, but it could also be easily argued that the market has already priced all scenarios. Perhaps more importantly, the soaring inflation and devaluation of the Turkish lira make life very difficult for companies that feed off the domestic market and whose revenues are primarily in liras.
Historically, volume business was the name of the game in Turkey, rising on the back of its large consumer base. However, with the devaluation of the lira and inflation, companies with no hard currency income appear to be stagnated and recording no growth in USD terms, although they record lira-based growth. E-commerce/marketplace companies with millions and millions of users are perfect examples of this.
The purchasing power of locals is in decline, and this has a direct impact on business growth. Investors of various PPP projects, typically on toll roads and in healthcare, look for exit opportunities. Companies with export capabilities and focusing primarily on foreign markets are, on the other hand, registering record profits and growth as their costs shrink.
Fintech companies were once the rising stars. We now observe a slowdown in fintech deals as a series of new regulations appear to have triggered more of a wait-and-see approach from investors. Ventures around telehealth solutions also lost a bit of steam as the panic in the early days of COVID-19 seems to be behind, and investors look at these companies with a more conservative lens due to new regulations.
With a few exceptions, Turkey has always been a mid-market deal making space. An interesting recent phenomenon is that the number of mid-market deals appears to be decreasing significantly, with mega deals and lower market deals taking the front stage.
Overall, Turkey remains a hotbed for deals where risk and opportunity walk hand in hand. The market remains as rich as Turkish cuisine, with something for all tastes. One just has to find that which fits their risk appetite.
By Dogan Eymirlioglu, Partner, Balcioglu Selcuk Ardiyok Keki Attorney Partnership