The Istanbul Stock Exchange ended 2004 with a good premium and there has been some profit-taking, so it is normal that the market is off its high, according to the exchange’s vice-chairman, Hüseyin Erkan. “With new public offerings like Akmerkez and Petkim in the pipeline we’ll see new excitement. Actually, Petkim is a secondary offering, but the effect is the same.”
Mr Erkan also sees the start of EU membership negotiations as a big lift for the stock exchange, though no one in the financial markets has come out against the idea. “Once they start without delay, that will be good, and just being there vaults Turkey into another horizon.”
Profit-taking is one thing, however, and getting choked is another. Emerging markets took a beating in March and April this year as the US Federal Reserve indicated a stronger stance on interest rate hikes. At the same time, eastern European and other developing countries’ central banks have cut rates.
Turkey’s central bank, for example, cut interest rates a total of 500 basis points (bp) between mid-December 2004 and mid-April, the most recent an unexpected 50bp cut on April 11. The central bank was confirming the high likelihood of attaining and probability of undershooting the 8% inflation target, and expressing comfort that the IMF deal would go through soon, according to Tevfik Aksoy, chief economist at Deutsche Bank in Turkey.
This squeeze on the spread between developed market assets and the greater risk stocks and bonds of emerging markets will get tighter as the inflationary impact of higher oil prices starts to be felt, says one Istanbul banker. One saving grace for Turkey is that, more than any of its peers, it is moving toward more of an emerged status. And this transition will probably be speeded up soon when the country recalculates its per capita earnings statistics with a greater weight on parity purchasing power.
Turkish bulls
One broker in Istanbul disagrees. “Turkey is still an emerging market, only it’s experiencing added immunity these days,” says Mahmut Kaya, general manager at Garanti Securities.
Mr Kaya has reason to be bullish: he has filled his order book for the IPO of Akmerkez, the high street shopping centre in Istanbul. Akmerkez raised “very close to $200m” in a 49% equity offering on April 8, the largest IPO to come out of Turkey since the launch of Turkcell in 2000.
“We sold the majority of shares to foreign investors, funds specialising in real estate investment trusts and shopping malls,” says Mr Kaya. “We considered the squeeze factor, but it was not as bad as we thought. Turkey’s internal dynamics are strong enough to offset global pressures at the moment.”
Another market that is doing well is private pension funds. Only one year old in Turkey, it is growing fast despite the lack of substantial tax incentives. The market has drawn in 500,000 voluntary customers so far, mainly because basic pensions can not meet a professional’s retirement needs.
The Capital Markets Board (CMB) expects even better performance next year after Ankara straightens out its tax policy. “Companies have problems with the tax on pension investments and we’re waiting for the new legislation to clear parliament,” says CMB spokesman Bahadir Teker, deputy head of its institutional investors department.
Turkey failed to find any bidders for state monopoly TEKEL’s tobacco business in April, mainly because the government keeps raising the taxes on cigarettes and making it difficult for potential buyers to plan their financing. The main assets in the privatisation administration’s portfolio still hold investor interest, however. Armed Forces Pension Fund OYAK is determined to acquire state refiner Tupras, with or without outside financing, according to the fund’s CEO. And a joint venture between leading conglomerates Koç and Sabanci is keen to win the bidding for Turk Telekom.
Venture capital
The buyout market is hot but the lack of legal framework keeps private equity ahead of venture capital.
If you have seen Jack Bauer trying to save the US on the hit TV series 24, then you have seen Turkish technology in action. Every desk shot in the counter-terrorist unit headquarters features a Cisco IP phone, the enabling software for which is written by Istanbul-based software provider Nevotek. With Turkish entrepreneurs even more starved of capital than their US and European counterparts, the venture capital business in Turkey needs a Jack Bauer of its own. So how did a tiny company in Istanbul manage to put itself on the global IT radar and get a contract with giant Cisco?
“That’s easy, one of my three partners used to work at Cisco,” says Nevotek general manager Arda Unsal. “It’s a great thing, too, because our software would be meaningless without Cisco’s platform.”
According to Mr Unsal, the firm had a 45-fold increase in sales last year over 2003’s performance – its system software for the hotel industry has been installed by Marriott, Mandarin, Sheraton and Inter-Continental – and it expects the same again this year, “although starting from very small numbers”. Nevotek refused to release the figures while the firm’s majority shareholder is talking to possible investors.
Enter the venture capitalist. Aside from the three founders, Nevotek’s fourth partner, Is Venture Capital (IVC), holds a 75% stake in the firm. A subsidiary of Turkiye Is Bankasi (Isbank), the largest private bank in Turkey, IVC is listed on the Istanbul Stock Exchange and has about $50m to invest in new ventures, with most investments less than $5m.
About 80% of the 300 companies listed in Istanbul are small and medium-sized enterprises (SMEs) but 80% of the trading is in the large cap stocks, the top 30 that make up the Istanbul index.
“Creating demand is tricky in Turkey,” says IVC general manager Patrick Keating. “We’re an SME ourselves. You need a pretty good story to get attention.”
Hindrances
More substantive issues that are hindering the development of a strong start-up culture in Turkey include the lack of a legal framework, no protection for minority shareholder rights and lack of transparency, or too much corruption.
Another obstacle to a healthy market for investment in new ventures is that government bonds remain too lucrative, “You can make 17% or 18% risk-free,” says Ken Morse, who heads MIT’s Entrepreneur Centre and last year helped to set up the Turkish Venture Capital Association.
Some substantial companies have gone public this year; no technology firms but, according to Mr Morse, the trend is in the right direction. The buyout game is hot now and, once it starts, people and assets are freed up for new ventures, he says. The two go hand-in-hand but “smart people won’t play the game if it’s rigged”.
Mr Morse expects more “serial entrepreneurs” in Turkey than in Europe, with people exiting one business and putting their money into another. An unfortunate aspect of Europe is that people sell out and retire, withdrawing their capital from the market. The venture community in Turkey includes business angels: the current climate is conducive to them, so Mr Morse believes there will be more of what he calls “repeat offenders”.
The Entrepreneur Centre at MIT has taught Turkish students for years and started a business plan competition with a Turkish non-governmental organisation at the beginning of April, which “should inject eager beavers with the entrepreneurial virus”, says Mr Morse. His team at MIT also helped to write draft legislation on the protection of minority shareholder rights, which should go before Turkey’s parliament this year and, ideally, will help to create a better exit market.
Entrance strategy
One man who is more interested in entrance strategy these days is Evren Unver of Turkven, a private equity firm in Istanbul. According to him, there is a lot of activity in the market this year but very little in the early stages. The significant work is in buyouts and growth activity, with the market feeding off the wave of positive news, whether political or otherwise. The good news is mainly Turkey’s green light for EU negotiations and increasing macroeconomic and political stability, with inflation down to single digits for the first time in three decades.
Venture capital in Turkey is not even an infant, according to Dilek Cetindamar, an associate professor at Sabanci University in Istanbul; it is still pre-natal. “A lot of these private equity firms say they do venture but they don’t really,” he says.
Keeping with the later-stage strategy, Turkven has made a bid for Digiturk, the country’s leading satellite TV service with about 880,000 subscribers. The tender process is due to be completed by June. But, while there is not much going on in IT in Turkey, Mr Unver is open-minded: “In fact we’re sector agnostic.”
IVC’s Mr Keating, whose firm has invested in a carpet manufacturer and a chain of cinemas, has the last word on sector agnosticism: “We’re not experts in any field but we know how to add value. Higher risk for higher returns, that’s the name of the game. Everybody has the same goal – put in, make money and sell.”
