Floating hope

The past few years have been tough-going for investment bankers in Turkey. But much-needed financial reforms, allied to a rising and increasingly stable economy, are finally instilling much-needed confidence in Turkey’s investor base.

To view the digital version of this report, please click here.

It has never been easy to be a capital markets banker in Turkey, but rarely has it been this hard. In recent years, the market for IPOs has virtually dried up. Deals do punctuate the market, although they are few and far between: the last significant IPO was retailer Bizim’s US$250m-equivalent January 2011 IPO in the midst of a relative flurry of issuance that was brought to a halt by a sale in another retailer.

The US$515m ‘re-IPO’ of supermarket owner Migros in April 2011 was a success, but the surprise loss disclosed in quarterly results one month later caused the share price to collapse – taking with it the ECM pipeline.

In most cases where hefty issuances do occur, they are secondary share sales by large domestic corporates. Note the US$2.5bn November 2012 follow-on by Turkey’s seventh-largest lender, Halkbank.

In one of the emerging world’s great economies – one which boasts fast-rising retail sales, manageable inflation, an expanding economy and a current account deficit that narrows each year – why is it so hard to find viable listing entities attractive to a blend of local and foreign investors? There are many answers to this question, each of which offers pleasingly simple and achievable solutions.

Turkey’s capital markets lack depth. Any headline-grabbing stock sale here tends to succeed only when global institutional investors pile in, searching for healthy yields and dividends. When global markets have a poor day, so do local equity sales.

“The main challenge is that Turkey’s capital markets are too small and too illiquid for non-Treasury activity,” said Kaan Basaran, head of origination and sales, Turkey, at Nomura. “The institutional investor base in Turkey has yet to develop: it is not deep enough to handle major local equity or debt sales by itself.”

Channelling new capital

In an effort to rectify this situation politicians in Ankara pushed through a series of much-needed financial reforms on the first day of the year, creating a new national pension scheme. Anyone investing up to TL799.50 (US$443) a month into the new fund receives an extra 25% from the government to add to the total.

“The main challenge is that Turkey’s capital markets are too small, and too illiquid for non-Treasury activity”

This “matching system”, it is hoped, will deepen the country’s markets by channelling new capital into local insurance firms and pension funds. “The pension reforms are a deeply encouraging sign for the whole country, and a natural and important stage in Turkey’s development,” said Julian Macedo, a director in equity capital markets at Barclays.

Another factor, unlike in, say, South Korea, the US or Australia, is that stock ownership is just not a big deal in Turkey. There is a reason for this. The second half of the 20th Century was not kind to Turkey, hemmed in between a struggling Africa, a hostile Soviet Union, and a largely chaotic Middle East.

Military misrule and rampant corruption held back economic growth and directed public money into the pockets of the well-fed and well-connected. Only after a financial meltdown at the turn of the millennium, and the promotion of a stable political system under the aegis of premier Recep Tayyip Erdogan, did the economy turn the corner.

Triple 5 economy

Now, says Turalay Kenc, deputy governor at Turkey’s Central Bank, the country can aim for what he terms a “5-5-5” economy: 5% inflation and 5% economic growth, and a current account deficit no greater than 5%.

Kenc said those aims were “realistic” in the medium term, and should lead to more citizens “trusting in the long-term viability” of Turkey’s economy. And that, in turn, should broaden the country’s stock of share owners, as a new generation learns to accept, and even embrace, the concept of investment risk.

“The institutional investor base in Turkey has yet to develop: it is not deep enough to handle major local equity or debt sales by itself”

These, however, still remain distant ambitions.

Yes, capital market activity in Turkey is on the rise: total equity market issuance more than doubled in 2012 year on year, to US$3.57bn, according to data from Thomson Reuters. That outpaced new equity issuance in Poland, the beating heart of Central and Eastern Europe’s capital markets; as recently as 2012, IPOs and follow-ons in Warsaw outpaced Istanbul’s meagre total five-fold.

Lost momentum…

But since then it has been slim pickings. In the current year to March 13, a total of 31 equity sales worth US$3bn were completed on the Warsaw Stock Exchange. Over the same two and a half month period, the Istanbul Stock Exchange hosted a single equity sale – the US$142m float of real estate firm Halk GYO, hardly the sign of a market with global appeal.

In truth, IPOs do pepper the market, month in, month out. Bahar Sayiner, head of corporate finance at Erste Securities Istanbul, is correct when he said Turkey’s primary issuance market was “never idle”.

The trouble is, most sales are simply too small for either local or global funds to bother with. In 2011, 22 IPOs were completed in Istanbul, raising a combined US$701m, a total that includes Bizim’s mid-sized issuance. That valued the average IPO at a peanut-sized US$3m. Last year was even worse: just nine IPOs were completed in Turkey, raising US$139m.

“What is lacking [in recent years has been] sizeable deals, which depend on international investors for institutional demand,” said Erste’s Sayiner. Small IPOs with low flows are “kind of doomed in this environment”, said Cem Ciprut, head of investment banking, Turkey, at UBS. The trouble is Turkey rarely coughs up the sort of slam-dunk stock sales that attract investors from all over the world.

… but hope is on the horizon

By example there is currently a €250m IPO in the market for Pegasus Airlines, an entity from the Sabanci family’s Esas Holding. A live deal, especially one with a €250m target deal size, should be like nectar to bankers starved of ECM sustenance. As a Turkish deal there are no guarantees of success, and the challenge is only intensified by the company being a low-cost airline – a notoriously tough sell as they have so rarely guaranteed equity investors anything other than underperformance.

There are reasons to be optimistic. A large chunk of Turkey’s economy remains in the hands of vast family-run holding firms with names like Dogan, Koc and Sabanci. Most of these conglomerates remain unlisted, denying local and foreign shareholders the ability to invest in, and profit from, Turkey’s compelling growth story.

That, though, is slowly changing. Scions of leading conglomerates, many of them educated (academically and financially) overseas return home to run the family firm, bearing a different mindset.

“Foreign asset managers are increasingly visiting Turkey to find out what is going on here, and more will come as Turkey’s economy continues to grow”

“Increasingly, you are seeing third-generation family members, having received their international MBAs, come home with a different financial outlook [to their fathers and grandfathers],” said Mike Davey, country director at the European Bank for Reconstruction and Development. “Many want to make changes, push through IPOs, spread the ownership among multiple investors.” Yet this will be a long-term process. “You can’t ignore the fact that family ownership is the dominant theme here and will be for some time.”

While Pegasus is a sign of this move, the market may take time to adjust to this change in thinking. A US$500m sale of stock this March by three family members in Koc Holding, after so many years of a static shareholder register, spooked investors and the sale was ultimately cancelled.

Moreover, sizeable stock sales will return to the country sooner rather than later. Some investment banks – Citigroup in particular – have scaled back their presence in Istanbul in recent years. But others like UBS and Deutsche Bank are ramping up local headcount, as are many global auditors, asset managers and law firms.

“Foreign asset managers are increasingly visiting Turkey to find out what is going on here, and more will come as Turkey’s economy continues to grow,” said Ilhami Koc, deputy chief executive of local lender Isbank.

Bankers expect a steady flow of major stock sales to pique global interest. The Turkish government is expected to sell down a substantial stake in state-run Vakifbank, probably in the third quarter, raising around US$2bn for the Turkish Treasury.

Another divestment, of a 6.68% stake in Turk Telekomunikasyon is also expected in the second half of the year, cutting Ankara’s stake in the country’s largest telecoms carrier to 25%.

Further ahead, many eyes are fixed on an IPO by Ziraat Bank, the country’s second-largest lender after Isbank, with US$90bn in assets. That sale, which could top US$3bn, is likely to be pushed through by an eager administration no later than the end of 2014. This steady flow of privatisation deals, with the government divesting digestible stakes in state-run firms, is set to continue for many years.

“The market is looking ahead at a few jumbo deals,” said UBS’s Ciprut. “And as the markets in Europe pick up, we will see a greater [amount of] activity in Turkey as well.”

Expect a few blockbuster equity sales as the year progresses. After that, for this economic giant-in-the-making, anything is possible.