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Mayıs 2020

Private Capital Transactions in Turkey and Environs Going Forward | 06.05.2020

Online Brainstorming Session-3


Participants; Ahmet Faralyalı – Managing Director, Mediterra CapitalErman Kalkandelen – CEO, Franklin Templeton - TurkeySerkan Kızıl – Managing Partner, Taxim CapitalMurat Özgen – CEO, İş Private Equity, Anthony Stalker – Partner, CEECAT Capital and Barış Öney  Founder and Managing Director, Globalturk Capital and EMPEA Turkey Representative.

Highlights of the Session

A Snapshot of the Current Status:


The GPs who have attended our Brainstorming Session have been investing in Turkey for quite a long time, some since 2000 and some since 2015. They’ve invested in consumer-oriented sectors to industrials, healthcare and ICT among others to date. It was therefore a very informative fact and idea sharing session, where we found it very useful and had a number of takeaways. 


CEECAT Capital, formerly ADM Capital, have been investing in Turkey, Eastern Europe, Russia and Central Asia since mid-2000s. Having been investing in geographies where macro volatilities and uncertainties have been the operating norm, the first point of focus was “liquidity” and “survivability”. A key factor in coping with the magnitude of this disruption, is a culture of good corporate governance with clear and decisive lines of communication and decision making that does not rely solely on one person.  This allows for effective communication within firms and timely and decisive action. 


Having a diverse portfolio spread across different countries provided early warnings for CEECAT, to take the necessary precautions and develop responses as early as possible. 


CEECAT’s general approach has been threefold; survive the initial uncertainty, preserve cash an, look to use the time to focus on opportunities. Downtime or prolonged business disruptions can have positives as well, allowing time to focus on specific corporate weaknesses and preparing companies for the new norm. It is also important to plan for the possibility of longer disruptions or a second or third wave. 


İş Private Equity is working on restructuring the loans, increasing credit lines and minimizing costs of its portfolio companies and the companies tend to apply for the Government incentives and financial packages. The portfolio companies in the tourism and retail sectors obviously been adversely affected, but their medical devices and data center companies have not. Therefore, it has once again proven that it is a key to have a diversified portfolio


In February, just before the pandemic hit Turkey, İş Private Equity exited from two of its portfolio companies, one of them being a restaurant chain and the other being a chain of coffee shops. 


Some shopping malls are opening up by the 11th of May, but others will open by the 1st of June. There are continuing negotiations regarding rent between the retailers and mall owners. Also, factories are planned to be opened soon. 


The magnitude of the effects on the tourism sector is yet to be seen, especially on the future behavioral patterns of tourists. Cancellations on summer travels are widespread and certainly financing is needed for the sector in general. But with the new Government Program, the sector could start picking up by June. 


Franklin Templeton has four retailers in the portfolio; three of them are offline and one online. Two of the offline ones have started to open their street shops just recently. The initial numbers seem to be good but certainly not indicative at this stage. Portfolio companies in the food and online sectors are doing very well. People have been spending disproportionate money and time on getting and accessing food in the last couple of months, both online and offline. The portfolio companies in the logistics and packaging sectors are doing well. 


Domestic trajectory is key. The Government is allowing businesses to open slowly and possibly fully in June. However, the pattern of consumer behavior is yet to be seen


It is early to assess the banking sector, as well as the performance of the industrial and mining sectors. Factories are running with extreme caution and are all reorganized, i.e. working on the production lines, seating in the food halls, transportation of employees. Most white-collar employees are working from homes.


Mediterra, acted very swiftly in the beginning of February, and asked their portfolio companies to draw down their maximum bank lines available to them and tried to increase their credit lines to maximize liquidity. And thanks to that strategy, even for the worst impacted company, being in the restaurant business, managed to create sufficient headroom to carry the company until the end of the year, even if no restaurants are to open. 


Investing in a consumer staple business within the portfolio even in the crises times to provide some downside protection due to its cash generating ability, was a strategy and therefore a food company (number 1 flour brand in Turkey - Soke) was intentionally invested for that reason. It has proven now that the company has been running in three shifts and delivering record cash flows. Similarly, aquaculture business exporting to supermarkets in the UK, USA and Italy is outperforming budgets.


Their small home appliances company, where it is importing mainly from China, took a decision early on to order as much of their goods that can possibly be ordered and built-up its inventory. This really served well. Also, during the first quarter, 23% of the domestic sales were from online. By taking such precautions, the company managed to make 65% of its revenue budget in April and remains profitable. 


All in all, Mediterra took all such precautions and by mid-April, all such measures were more or less in place. And more so, the focus since then has been on investing. The crises obviously have brought up many opportunities with it and rapid decisions and acting swiftly could pay-off in the future.  


Taxim continued to operate effectively with their low risk investment philosophy. Their portfolio companies had little to no financial debtwhich they are using now to support the businesses as necessary. Liquidity was their number one priority as for everyone during this crisis. And they continued to closely manage individual companies. Some businesses are more adversely affected by the Coronavirus but the belief is that they will make it through the crisis and thrive out strongly.


Overall, their portfolio is in a strong position which is comprised of B2B and B2C businesses. They have two technology, one manufacturing, one pharma and two consumer businesses. The restaurant and retail apparel were the most affected ones, where the locations have been shut down since mid-March. Until the end of April, the focus was on cash, using available credit lines and working on the different payments on loans, trade payables, minimizing expenses and very close monitoring. Not to mention taking advantage of all the Government incentives and keeping close and frequent contact with customers and suppliers to the extent possible. 


However, now, with the beginning of May, they started to be in offense mode, positioning their companies for a strong recovery ahead of competitors. They believe, companies surviving this crisis will come out stronger and therefore plan for the next phase across the portfolio.



Going Forward:


Tourism is an important part of the fabric of the Turkish economy especially as a substantial foreign currency generator. The same is true for Spain, Italy, Croatia and Greece where tourism makes up a very substantial part of GDP. Greece is bidding very strongly to open up, sending very strong messages that they want people traveling, and they've opened up the islands. They want people coming and want to get the tourist dollars in. 


From Turkey’s point of view, this summer Turkish people will probably not travel to Europe especially with the current exchange rates. It is also a questionable whether they will travel within Turkey to summer resort areas or not. The Turkish Government has focused mainly on Russia and Germany for the incoming tourists. It was just announced that Turkish Airlines will start flights to four cities in Germany in June. There was a survey done in Europe recently, where people were asked whether they would be willing to travel within the next three months outside of their country. Around 20% of Germans have responded positively. $52 billion representing 6% of Turkey’s GDP comes from tourism, so it is not a small amount. The Ministry of Tourism is expected to announce the tourism strategy soon and then it will become clearer on how the hotels, restaurants, beaches and tourist attractions will be open and the hygiene, health and safety conditions that will accompany this. 


It was collectively agreed that Turkey really has done a good job managing the COVID-19 crisis and that to date the crisis appears under control with a very low level of death rates. One of the main hospitals in Istanbul had 300 patients in the ICU since mid-March and had zero deaths. 


One of Mediterra’s partners, together with one of his friends, initiated a tracking and monitoring app, which later joined forces with the Ministry of Health. It is similar to what people use in China and other countries for tracking and monitoring. And without even being promoted by the Government, the app today has few million downloads.


The question is, is it possible to convince people and consumers that normalization is happening and it is safe to go out? So, it needs to be well communicated.


Turkey has one very big positive, which is the Turkish Airlines. If the Government can use that and send the message that it is safe to come to Turkey and open-up, tourists could start coming again. People coming out of this Pandemic, would certainly want to get out and go somewhere and they need to be convinced that it is safe.


Investment Themes post-pandemic…


One of the top investment themes discussed in the post pandemic world was “digitalization”. Turkey broke out of the European trends and is converging more towards Asia in terms of many digital metrics. For example, 37% of Turkish people have shopped online, as opposed to 20% to 25% levels across Europe, whereas it is 65% in China and about 50% in Korea. So, Turkey is the third in terms of countries going online shopping. The consumer experience will soon go more for digital banking, digital dining in the restaurants with touchless ordering, payments, delivery, etc. and the like.


The Turkish online e-commerce, actually the infrastructure part was well tested during this period. The delivery times for groceries could be three to four days, whereas in Europe, it went beyond a week or more. FMCG online sales grew by 300% as compared to pre-corona period and the infrastructure handled it pretty well. Therefore e-commerce, infrastructure, corporate digitalization, moving to cloud, cyber security, all of those things will be a major beneficiary as the next growth businesses.


According to Franklin Templeton’s observations, many of the digitalization will mostly happen in the B2B area rather than B2C, which is pretty monopolized, like Hepsiburada, Yemeksepeti could be the winners over time. One obstacle for B2B digitalization not happening fast in Turkey is the source of funding. More VC funds would certainly help increase the scale in this area. 


On the consumer side, it is expected that the discretionary consumer business will be affected immensely but the non-discretionary ones may continue to perform well. Those businesses that are more of a necessity rather than nice to have, are likely to perform well, cybersecurity, for example. 


One of Taxim’s investee companies is in the cyber security area for example and they decided not to revise their annual guidance downwards due to their strong performance. Same was the case for another portfolio company invested earlier, in the software business.  Both companies operate in the B2B space with non-discretionary business models, benefiting from the digitalization in Turkey.  In parallel, as long-term focused investors, they are looking for opportunities. Pipeline has seen a decrease since there are less deals being brought by the intermediaries and advisors to their attention, but their new investment generation efforts are on-going proactively on a more proprietary basis. They even plan to issue term-sheets within this month to a number of companies. 


In addition to manufacturing and technology businesses, which Taxim prioritizes these days, they will also be looking into good businesses that may be in cash flow distress. However, investing in distress situations is difficult in Turkey, because the banks generally don't like to get haircuts to do the deals. Nevertheless, these could still be assessed going forward.  


İş Private Equity thru its sister company Maxis, has been focusing mainly on technology for some time and plan to make investments. They already made an investment to a cybersecurity company pre-corona on the venture capital side. 


The general consensus on the cross-border transactions, which are important for exits, is that even if the digital channels could be used, the deals cannot be done simply just through digital means. And investors will definitely travel to have person to person meetings and on-site diligence.





The pandemic period so far has been quite difficult for portfolio companies in the discretionary consumer, retail, restaurant, tourism and relevant sectors as well as some manufacturing businesses. Nevertheless, the ones in the food and packaging, e-commerce, technology, logistics, medical equipment and the like seem to be less affected. It is certainly a one-of-a-kind period, not experienced before. On the one hand from one part of the portfolio companies, there are zero revenues but accumulation of debt due to cash burning; and on the other part of the portfolio companies, great performances are being observed. It is pretty much the case for the local and exporting manufacturers/producers, where the non-discretionary manufacturing/production facilities were shut down due to weak or no demand, but the discretionary ones are having record cash flows.


GPs focused primarily on the liquidity and restructuring of debt as well as accessing Government incentives for their portfolio companies. However, the adjustment period is coming to an end and GPs have started to look for new investment opportunities, and in fact planning on giving term-sheets soon. 


The pandemic crisis has been handled very well in Turkey as can be seen from the extremely low death rates and no capacity issues at the hospitals and ICU sections. The Government has issued numerous economic measures including financial packages and incentives. Banks are trying to restructure most of their loans, via extending maturities, providing grace periods, lowering interest rates and the like.


One major issue when re-opening is that, the Government incentives could be lost. If the businesses are closed and employees are not laid off, the Government pays up to one and a half times the minimum wage to the employees. But when they open, those incentives are cut. This creates a dilemma, where it is yet to be worked out. So, the uncertainties and daily struggles are expected to continue for a while.


There is opportunity for Turkey, but of course countries will be competing with each other in various ways including bringing investments into their countries post-corona. There's been quite a crowding out effect from governments on the debt side. Someone will eventually have to pay for it. And that means there will be less capital for emerging markets, so they will be in a vulnerable position right now. And globalization is under threat big time, where countries are closing their borders to handle the pandemic, which could continue for quite some time. 


Nevertheless, Turkey is expected to stand out with its potential in a number of areas, such as its tech savvy and flexible population, as well as its manufacturing capabilities, digitalization efforts and its most resilient business community.