Goodbye BRICS, Welcome BIITS

The acronym for the association of five major emerging national economies, Brazil, Russia, India, China & South Africa, has been on of the most frequently used elements in the financial terminology for recent years. Now, the outlook for emerging economies is stabilizing due to approaching new-normal and evolving international monetary reform, as some authors of Bloomberg introduce us the BIITS (Brazil, India, Indonesia, Turkey & South Africa).

Changing global conditions are also altering the risk perception of the emerging markets, that remained remarkably strong through recent years. The end of zero interest rate policies of developed economies is getting closer day by day. The threat of diminished global liquidity had already sparked the biggest emerging-market currency sell-off in five years, with the Indian rupee and Turkish lira hitting record lows. As most economists advise emerging countries to adjust a lower growth rate and refocus their economies, investors also reassess the assets held in emerging markets.

The general opinion is that emerging markets are no longer blanket buys, especially the ones who may remain vulnerable following the monetary tightening in the developed economies. This time, we do not have an acronym for shining emerging markets but for fading ones and the five major emerging markets that may likely be risky in the near future are BIITS, according to Bloomberg.

Speaking about Turkey, current account deficit is the chronic disease of its economy and its tremendous foreign exchange requirement to finance this deficit is putting the economy at risk. The annual growth rate at the end of last year was 2.2%, as well as was good sign in the way of re-balancing. This humble growth also led the economy moving out of danger with decreasing CAD.  However, 1Q13 results were simply unsatisfying; a 4.4% growth rate y-o-y and CAD up to $44 billion (this means a 25% increase in CAD).

Current Account Deficit to GrowthIt is not so far where investors will start to more choosy among emerging markets than they have been in the past and Turkey should be well-prepared to restrain the capital outflows.

Private Equity Funds in Turkey: Will We See a Reload ?

Private equity funds are collective investment schemes used for making investments in various equity securities according to one of the investment strategies associated with private equity. They can be can be used to capitalize new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. In the developed countries, they played a fundamental role of bringing together wealthy investors and private companies (especially not traded on a public stock exchange) in need of capital.

In 2000, Turkven Fund launched out into business world, and, concurrently it became the first private equity fund founded in the country. Another success story, Actera Group, which was set up in 2008, made its shining appearance in the market, and has whose assets under management now reached $1.5bn. Up to the present, over 70 private equity funds are on the lookout for profitable opportunities.

Macroeconomic conditions also provide an attractive environment for yield-oriented private equity funds. Following the historical Lehman Brothers’ failure, Turkey constrictedly suffered from the crisis. Moreover, it became the second-fastest growing economy after China with growth rate of 8.8% in 2011. With its economic power, Turkey drew the attention of the funds that are screening emerging markets for investments. Much more that 40 deals completed in 2011 and 2012, but, it looks like the ongoing upside trend line in mergers and acquisitions may be about to finish.

M&A Trend in Turkey - Marketmerger

Comparing to excellent results of 2011 and 2012, the number of deals we saw year-to-date is only 9, according to Marketmerger. As the recovery symptoms in developed world begin to become more clear, we see a sharp decrease in capital inflows towards emerging economies.  As might be expected, this is deteriorating the outlook of the PE market in Turkey. What is more, 2.2% growth rate, $5.8 billion current account deficit, fluctuating currency and the political unrest arising out of both domestic and foreign events are badly influencing the market.

The story of private equity funds in Turkey began perfectly, proceeded distinguishedly, but, recently it entered a rough era with some must-be-faced global challenges. Along with the current temporary inactivity in M&A market, Turkey will be an attractive market for both cross-border and domestic investors.