The perfect ingredients

Author: | Published: 24 Apr 2015
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Memet Yazici, managing partner of TRPE, discusses how Turkey is overcoming political and security challenges to secure a strong investment climate


Turkey has attracted over $136 billion in foreign direct investment over the last decade. Despite international concerns over political freedoms in the country with an increasingly authoritarian government under President Erdogan, and security fears along the Syrian border where Islamic State is waging war on the Kurds, rebels and Assad regime, Turkey continues to prove an attractive place to do business. Memet Yazici, managing partner of TRPE, explains why.

What makes Turkey such an attractive investment location?

The fundamentals of the country and its underlying economy are attractive to strategic and financial investors. They are characterised by three main elements:

  • A large, young and well educated population – presenting both a strong consumer market and available and motivated workforce to global investors;
  • A unique geographic location – proximity to a large market like the EU on one side and a narrow body flight distance to 30+ emerging growth markets on the other side creates a well-balanced trading portfolio; and
  • Strong relationships – long-term people-to-people relationships with near and far neighbours gives Turkey a competitive advantage.

The FDI did not only come as capital, it also came as a long term commitment from some of the leading global firms: companies like Coca Cola, GE, Microsoft, Pfizer, IFC, and EBRD have created regional headquarters in Turkey to manage large swaths of territory. Those institutions have chosen Turkey not only because of the local management and leadership talent, but also because of Turkey as a desirable destination for global management talent.

The country has seen some political instability recently, with the think tank Freedom House suggesting democracy is on the decline. Have such perceptions had any impact on inbound investment?

Global capital is always looking for three pillars: rule of law, stability and growth. Turkey has been able to provide all three for the last 15 years, and has been viewed as a reliable partner. When one of these is questioned by global investors – either in reality or in perception – you must address those questions swiftly. I think long term investors realise that Turkey is going through a political transition and expect the outcome to be satisfactory as net capital outflows have been minimal and more related to global interest rate fluctuations than anything else. That said, investors are asking more detailed and substantive questions about our short and midterm expectations.

Has the rise of Islamic State and the Syrian Civil War coming to Turkey's borders worried investors?

Yes of course. Investors worry that the current situation may mean a long term instability along the southern border of the country. The situation impacts Turkey's exports to Iraq and Syria, and also creates a humanitarian and budgetary burden on Turkey – that the international community has taken for granted and not sufficiently recognised or supported Turkey. However, investors realised the resiliency of the Turkish economy and the giving nature of the Turkish people has created a strong counterbalance. Turkey's military might as the second largest one in NATO ensures that the troubles will stay outside of the country, and investors do not worry about any adverse consequences to their assets or investments in Turkey.

What is contributing to the strength of Turkey's emerging capital market?


"Turkey is on the energy crossroads. There are a number of pipeline initiatives, which will help resources to be distributed more effectively"


The public markets are owned 65% upwards by foreign investors, and it has been like this for some time. Turkey is a proven market for liquidity and resiliency for global investors. It has also performed well over a 20-year period. Three underappreciated points that will continue feeding the strength are: growing private pension plans will continue to become a force in the local markets; under the mattress gold inventories will gradually participate in capital markets (estimated to be around $350-$400 billion in value); and a large group of growing SMEs growing to capital market size.

These points will drive growth both on the supply and demand side of capital markets and our expectation is that the market cap of the Turkish market will easily more than double in the next decade.

How has Turkey's Capital Markets Law – and its secondary legislation – altered the country's capital markets?

Both the Capital Markets Law and the new Commercial Code are targeting to achieve higher transparency, better accountability and governance, and the protection of the minority/small investor. To that end, the changes are positive and striving for the world standard. It will take some time to see the impact on the companies, but we are already seeing much better functioning boards, which is helping transform companies.

The Turkish Banking Association expects profits in the banking sector this year to grow by 8%. What is contributing to the strength of the industry?

The Turkish banking sector went through a major crisis in 2001 and has come out of it with very strong regulation and self-discipline. They are focused on keeping the bottom line growing without taking new risks. Loans and expanded relationships with SMEs are the key driving factors for the bulk of the banks. The size of the SME relationship is expected to grow by 15% in 2015 despite the GDP growth expectation of only 3%. As a result, banks which can manage their risks will experience gains in profitability.

The energy market seems a particularly exiting one for investors at the moment. What is making it so attractive?

Turkey needs to grow its capacity to generate energy from all sources as fast as possible to keep up with economic and population growth. However you cut it, there is very strong secular demand and need. One needs to be careful though as the market has its own challenges – from distribution losses to infrastructure improvements. As a result, the Turkish market is only for the patient investor with a long term view.

What impact will Russia's decision to cancel South Stream and build a new pipeline via Turkey have on the energy market?


"Global capital is always looking for three pillars: rule of law, stability and growth"


Turkey is on the energy crossroads. There are a number of pipeline initiatives, which will help resources to be distributed more effectively and efficiently. Russia, Azerbaijan, Iraq, Iran all needs dependable, safe and cost effective distribution. Turkey is uniquely qualified and located to be a good partner for all.

How have Turkey's developing labour laws affected the country's investment landscape?

Turkey's labour laws provide protections for both the employer and the workforce. They are highly progressive in many ways and Turkey benchmarks ahead of most emerging markets and developed countries. Unionisation is falling behind like in many other countries, but the levels of unreported or child labour are not a major concern.

Turkey dropped four places in the World Bank's Doing Business 2015 ranking from last year. Why do you think this might be?

It is probably because the competition made better strides than Turkey. Fundamentally, Turkey needs to make it easier to start, grow and close down businesses – especially as the country is focusing on entrepreneurship as a key driver of growth.

Eight years ago Turkey reformed its tax system with the aim of simplifying and modernising it and aligning it with international standards. Has it proved successful in attracting investment?

The Turkish tax system is simpler and more modern than most of the emerging markets. Corporate tax laws and rates are investor friendly. That said, the challenge remains, while the system is simple it is also loaded with excessive usage and value added tax on key growth drivers like energy, telecommunications/IT and payrolls. So you are overtaxing the most highly levered portion of your growth engine. Turkey needs to spread the tax burden more evenly and allow key economic drivers some room to breathe.

About the contributor
 

Memet Yazici
Managing Partner, TRPE Capital

T +90 212 323 0021
E: memet.yazici@trpecapital.com
W: www.trpecapital.com

Memet Yazici is the managing partner of TRPE Capital, a private equity and venture capital firm focused on small to medium enterprise investments in Turkey.

Prior to TRPE, he led the private equity investment teams at Rhea Asset Management. He currently serves on the boards of Netas Telekomunikasyon, Probil and BDH Services.

Yacizi also acts as an advisor to One Equity Partners, and is a member of the Foreign Economic Relations Board of Turkey, and the CEE/CIS Council of Emerging Markets Private Equity Association.

He holds a B.S. degree in Engineering from Bogazici University in Istanbul and an MBA degree from University of Rochester, Simon Business School.


 

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