TBY talks to Jared Irving, Partner of KPMG Turkey, on the business climate for foreign investors and important legislative changes.

Jared Irving
Jared Irving joined the Istanbul office in 2008 with the mandate to develop and grow the transactions and restructuring business in Turkey. He has conducted numerous transactions including acquisition diligence, vendor due diligence, vendor assistance and SPA advice. Prior to joining the Istanbul office, he was with the Private Equity Transaction Services Group in London. He has also worked in a wide array of industries, including some of the largest European buyouts for European, British, and Turkish private equity houses.

How would you characterize the business environment for foreign investors in Turkey?

It's definitely an attractive market for foreign investors. Turkey has a large population base and a significantly expanding middle class with greater spending power. For any consumer-based company in Europe, it is beneficial to base operations in Turkey. Outside of consumer markets, Turkey is also starting to develop, particularly in financial services—different products are being introduced into the market that weren't here previously. Regulatory changes will also assist foreign investors and help to clarify some of the historical issues foreign investors have faced in coming to Turkey.

Is confidence increasing for long-term investments?

Much of our client base is made up of international investors who have invested in Turkey and have been here for a long time. Many of them have seen significant changes in the way that business is conducted in Turkey, and Turkish partners are becoming more reliable and easier for foreign investors to work with. The more foreign investors come to Turkey, the easier it becomes for the next group of investors that arrive.

How would you characterize the private equity environment in Turkey?

Relatively speaking, there is very little private equity in Turkey. For the size of the market, when compared to Europe and the US, it's very small, but it is increasing. There is an increasing number of local funds being raised, but it's still a difficult market. As fund returns around the world have been producing diminishing returns in the last five years, LPs are being more selective on where they place their money. However, there are some very good local funds like Actera, Turkven, and Mediterra Capital, which are all fundraising or have recently announced funds. There are also the international funds with a local representative office and/or regional funds. The number of these funds looking at Turkey is ever increasing because they already have established funds and their structures allow for Turkish investment. We are seeing the likes of TPG, KKR, Blackstone, and Premiera active in the local market.

What are the most important changes to the Turkish Commercial Code that foreign investors should be aware of?

The main alterations are changes to financial reporting requirements and changes to corporate governance. Moving to IFRS will be a significant development for Turkey. The changes will require audits and oblige companies to place their accounts in the public domain. The changes to corporate governance requirements will also be a significant improvement, although it will be somewhat more difficult to implement in practice. Turkey is slightly odd compared to the rest of Europe, where audits are required for most medium to large businesses. Previously, Turkey had weak audit requirements, covering largely only financial services businesses and registered or listed entities. This previously reduced the quality of company reporting for un-audited businesses. This is a significant change for corporate culture in Turkey. I believe that many of the local companies will be afraid of the changes that are coming and don't know how to handle them. From the government's perspective, this demonstrates a genuine desire for change. It should help to reduce the unregistered economy in Turkey, as well as improve transparency, help openness, and assist foreign direct investment, all to support a growing economy.

What are your expectations for M&A activity in Turkey?

M&A activity is going to be very widespread and cover many sectors. The two main sectors that are seeing increased activity at the moment are the energy and consumer sectors. In the energy sector, there is a deficit between future consumption and total capacity, even with the new capacity currently being brought online. This gap needs to be filled. The only way to really fill this gap is through FDI—the government cannot fund the levels of investment required. Its privatization program is trying to liberalize the market and ultimately provide better pricing for the consumer. This is encouraging foreign energy businesses to move into the market. One such example is the joint venture between AES and Koç: AES Entek. Sabancı also works with Verbund in Enerjisa. RWE also has a strong presence, as does Norwegian renewables firm Statkraft. We have also recently seen the announcement of a large joint venture between E.ON and Doğuş Group. Many of our European clients have Turkey high up on the agenda. We are also seeing a lot of M&A activity in the consumer market. This activity is largely driven by macroeconomic factors—Turkey has a large population with growing wealth and spending habits. The deals we are seeing range from retail to FMCG.