[co-authors: Ümit Hergüner, Kayra Ücer]*
1. What is the current business climate in your jurisdiction including major political, economic and/or legal activities on the horizon in your country that could have a big impact on businesses?
Considering that 2019 brought one of the quietest years in Turkey’s history in terms of M&A activity and investments, expectations were low for investments and business in 2020 with the added effect of the COVID-19 pandemic. Additionally, the Turkish business climate faced risks brought about by the political and economic uncertainties surrounding the region. However, despite low expectations, the Turkish market and economy managed to increase in both the number and volume of transactions compared to 2019.
According to the 2020 edition of Deloitte’s Annual Turkish M&A Review, the disclosed transaction volume of M&A deals in Turkey was USD 6.3 billion. Based on this figure, Deloitte has estimated the total M&A transaction volume in 2020 in Turkey to be around USD 9 billion, which amounts to a 70% increase compared to the previous year.
This activity spike was in part due to the Turkey Wealth Fund’s investments, who carried out the biggest M&A deal of 2020 in Turkey by acquiring a 26% stake in Turkcell İletişim Hizmetleri A.Ş., the leading mobile phone operator in Turkey, for USD 1.8 billion. Our firm assisted long-term client Telia Company during this biggest M&A transaction of the year resulting in their exit from the Turkish telecom market after two decades of influential presence. The Turkey Wealth Fund also consolidated six state-owned insurance and pension companies through a series of acquisitions for a total consideration of approximately USD 953 million.
A similar trend has been observed during the first half of 2021 as M&A and investment activity in Turkey has continued to increase. One reason for this lasting increase is due to the devaluation of the Turkish Lira which proved to be favorable to foreign investors for their entry into the market and/or new acquisitions. Despite some of the political issues observed throughout the region, Turkey is favorable to foreign investors due to the affordable currency and foreign investor-friendly legislative framework.
COVID-19 is also a factor facilitating the increase in market activity. During the COVID-19 pandemic, many European companies have struggled with accessing production facilities located outside of Europe due to lockdowns and the suspension of transportation activity. In response to this, and thanks to Turkey’s favorable geographic position and dynamic workforce, European and even some Chinese investors have viewed Turkey as a favorable alternative location for manufacturing plants as it is viewed as a strategic place to add to the supply chain given the geographic positioning, contributing to a spike in investment activity in the country.
In terms of infrastructure investments, while new investments have slowed down, the market was still very active due to a number of restructurings that took place in the sector as a result of the value depreciation of the Turkish Lira. Our firm was active in many of the sizable restructuring and refinancing deals that took place in the energy and healthcare sectors.
In terms of forward-looking expectations, in 2023, the much-anticipated presidential elections will take place in Turkey. After these elections, more political stability is expected to be seen in the country which we expect will lead to an even greater increase in market activity, particularly from foreign investors. Therefore, we expect for this positive spike to continue and grow in the years to come.
2. From what countries do you see the most inbound investment? What about outbound?
According to the Presidency of the Republic of Turkey’s Investment Office, the majority of Turkey’s inbound FDI has continuously originated from Europe, North America, and Gulf countries through the past 17 years, but the share of Asian investors has been noticeably on the rise as well. Most notably, in 2020, Italy became the top investor in Turkey with USD 977 million invested, overtaking Turkey’s usual top investor, the Netherlands, followed by the United States with USD 798 million and the United Kingdom with USD 693 million. Other notable investors in 2020 include Luxembourg (USD 428 million), Germany (USD 264 million), Hong Kong (USD 157 million), France (USD 144 million), and Japan (USD 113 million), further supporting the trend that has been ongoing for the last 17 years.
In our firm, we have experienced a number of shifts in our foreign clientele since 2018, including an increased number of foreign clients jumping from 38% of our total revenue in 2018 to 58% in 2020. This falls in line with the national trend of increased activity from foreign investors and the spike in market activity. Alongside the slow but steady increased interest in Turkey from Asian markets, the percentage of our foreign revenue from both China and Japan has increased over the last three years. Additionally, as suggested by Italy rising to the top of foreign investors interested in Turkey, our percentage of foreign revenue generated from Italian clients has also seen a slight rise. Other notable foreign clients that our firm conducts significant work with include the United States, France, Germany, the Netherlands, the United Kingdom, Switzerland, and Finland.
In terms of outbound investments, Turkey is historically a country that has focused on inbound investments. However, as the country has continued to grow, many Turkish investors began expanding their investments abroad, which at times included the relocation of a majority of a company’s investments abroad by some of the leading holding entities in Turkey. The majority of outbound activity is conducted by construction companies who are attracted to investing in the hospitality sector in Russia, the Caucuses, and Northern Africa. As of 2018, Turkish investors have focused the bulk of their investments in the United Kingdom, Eastern Europe, China, Russia, India, and Mexico.
Our firm has played a significant role in helping Turkish investors active in the construction and mining sector expand their business, create subsidiaries abroad, and invest in infrastructure projects throughout regions such as North Africa and the Central Asian Republics. Most recently, our firm is helping a major Turkish logistics company with their investments in Uzbekistan.
3. In what industries/sectors are you seeing the most opportunity for foreign investment?
There are a number of areas where we see an opportunity for foreign investment, including areas where Turkey has always been an active market such as infrastructure investments, as well as relatively new areas such as technology, gaming, and e-commerce where Turkish start-ups have made global headlines for acquisitions made by global leaders in the sector, including acquisitions conducted by major foreign companies like Zynga and Alibaba.
Over the last decade, Turkey has experienced a massive jump in terms of infrastructure investments and was among the top 11 countries in 2021 for private-party participation in infrastructure development and financing, and a substantial part of this financing was raised by foreign lending institutions.
There have been a total of 18 airports, 20 hospitals, and 41 highways built over the past two decades utilizing private-party funding, particularly through public-private partnerships. Although investments are expected to slow down in the next few years given the impact of the pandemic as well as the volatility of the Turkish Lira, there are still a number of infrastructure projects lined up for tendering where development and financing by private parties is expected, including a recently announced tender for the Taşucu Port located on the Southern Coast of Turkey.
In terms of infrastructure investments, Turkey has also recently passed legislation as a testament to its intention to create a financing environment in line with the needs of the infrastructure sector. Accordingly, new legislation on project bonds was issued by the Capital Markets Board to allow access to less traditional financing methods to back up infrastructure projects in line with worldwide trends. There have also been steps to introduce a proper legal framework to govern the already popular crowdfunding transactions with a revision of the Capital Markets Law in 2020 which explicitly recognizes this form of financing. The draft of the regulation to be issued by the Capital Markets Board to set the details to govern crowdfunding transactions was published in August 2021 for review and comments.
On the M&A front, as noted above, opportunities have been on the rise in the industry and manufacturing sector as well as the e-commerce sector. During the COVID-19 pandemic, due to nationwide legislative changes and lockdowns imposed by governments all over the world, many European companies found that access to production facilities located outside of Europe were difficult to access, posing serious problems for their business. To combat this issue, many strategic investors have turned to Turkey as an alternative location for manufacturing plants as the country is viewed as a strategic place to add to a supply chain given the geographic positioning and low value of the Turkish Lira. This has led to a rise in M&A activity in Turkey and an increased appetite for investment as companies look to expand their businesses and manufacturing factories to Turkey.
There has also been increased activity in the e-commerce arena. Our firm assisted Alibaba, one of the largest online retail companies, on their entry into the Turkish market (and subsequent financing) and the acquisition of the Turkish e-commerce company Trendyol. We have also seen activity from North America in terms of expanding e-commerce to Turkey, such as our work with the e-commerce company Busbud and their expansion into Turkey.
Additionally, the renewable energy sector has been one of the areas gathering the interest topics of investors in Turkey. Prospective investors and existing investors in the sector alike have all shifted their gaze towards renewable energy in Turkey and we can expect to see much more investment activity on that front in terms of bond issuances as well as the sale of stakes in existing renewable energy infrastructure projects.
4. What advantages and pitfalls should others know about doing business in your country?
Some of the advantages for foreign investors doing business in Turkey include how investor-friendly the investment environment is. Specifically, there are a very limited number of sectors in which foreign investment restrictions exist. Turkey also has a very investor-friendly take on arbitration and enforcement lawsuits as the Turkish courts have significant experience with enforcing foreign awards in Turkey that has been ongoing for decades. The low value of the Turkish Lira and the affordable labor in the country are also factors that may be appealing to foreign investors.
When it comes to pitfalls, while the Turkish Lira may be appealing to investors due to the low cost compared to the Euro or Dollar, the economy is volatile which may pose risks for investors.
5. What is one cultural fact or custom about your country that others should know when doing business there?
Although the idea of corporate governance no longer represents a set of guiding principles or simply an aspiration but a strict set of rules to follow, personal connection is still an important part of doing business in Turkey. In addition to many publicly held entities, there are many family-run companies that hold a leading position in many key sectors. Turkish businesspeople attribute a great level of importance to personal connections with their business partners and building personal trust in addition to the legal trust achieved through contracts. Unlike in many other cultures, personal questions such as questions directly relating to family or children in Turkey are usually seen as a reflection of genuine interest and are often welcomed.
*Hergüner Bilgen Özeke