Private Equity and the Turkish Zuckerberg

You don’t need to be an economist to know that Turkey is small and medium enterprise (SME) country; spending a weekend in the country would be more than enough. Unfortunately, only 20 percent of these companies last more than a decade, according to Kamil Yılmaz of Koç University.

In his welcome speech to the conference “Turkish Experience with Private Equity” on April 5, he noted that most SMEs shut down because they are not able to make use of economies of scale by growing, and also have problems during the transition from the founding first to the second generation. According to the World Bank’s latest report on Turkey, which has yet to be published, Turkish companies have difficulty in developing new technologies.

Yılmaz believes that private equity’s real value to Turkish industry lies in providing management advice, innovation and governance, rather than financing. That was also the thinking of Sami Kariyo, CEO of hosiery and undergarments company Penti, when he sold a minority stake to The Carlyle Group, one of largest private equity firms in the world, in September.

But the two other panelists in the second session of the conference, “Portfolio Companies’ Perspectives,” were not involved in manufacturing. In fact, Kariyo emphasized that without the retail business, his company would have been worth only one tenth of its value. Of the top 30 private equity deals in Turkey, only two are in industry.

This is simply because it is much easier and more profitable to build airports than airplanes in Turkey. No wonder electronics and textiles giant Zorlu built a huge shopping mall and residence in Istanbul rather than invest in its core businesses. The private equity companies know this, and so they are interested in the services sector.

I don’t want to paint a gloomy picture. In fact, although my former colleague Esen Çağlar of Ankara think-tank TEPAV once explained why the likes of Facebook’s Mark Zuckerberg don’t live in Turkey, I kind of did get to meet one on Friday: One of the other two panelists was Rina Onur, a 28 year-old who, along with her partners, founded Peak Games in 2010 and made it one of the top three social gaming companies in the world.

As Çağlar noted in a later column as well, we also have our share of billionaire entrepreneurs. The Turkish Zuckerberg would in fact be a combination of Peak Games founder and CEO Sidar Şahin, a serial entrepreneur with successful flash sales site Trendyol under his belt, and construction magnate Ali Ağaoğlu.

You now know why I don’t share Kamil Yılmaz’s enthusiasm that private equity firms could be the answer to Turkey’s manufacturing woes. I agree with him that they increase productivity, and not only in the companies they invest in, as there are spillover effects as well. But they won’t invest in manufacturing unless the manufacturers themselves find it profitable to do so.

In this sense, I see the lack of private equity investment in manufacturing as the very definition of the competitiveness problem of Turkish industry.