Turkish infrastructure market risks ‘explosion’

Growth prospects remain strong for infrastructure in Turkey – but too much capital could soon be chasing too few deals in the country, delegates heard at PEI’s Turkey Forum in Istanbul.

Strong fundamentals should continue to underpin sustainable growth in the Turkish infrastructure market during the next 20 years, according to prominent industry insiders. 
Speaking at Private Equity International’s Turkey Forum last month, panelists explained that infrastructure remained largely spared from the short-term macroeconomic and political concerns that had shaken the country this year. This was largely due to the long-term nature of the asset class – as well as the impetus provided by the country’s urbanisation, demographic trends, and industrial and agricultural strengths. 
Yet speakers cautioned against a growing mismatch between supply and demand from cash-yielding projects.
“There’s going to be an explosion,” said Aygen Yayikoglu, managing partner at Crescent Capital. “A lot more capital is going to chase those assets, because more and more large-scale investors are going to have to diversify. And a one percent change in the policy of a large pension fund towards alternatives throws up billions of dollars – which are going to be chasing a relatively small number of long-term cash flow generating assets.”
That could potentially lead the market to overheat, concurred Vish Sathappan, managing director at AVKA Capital. “The macro drivers mean that there is a foreseeable demand for the coming decades. But from time to time this creates bubbles, with too much money chasing assets before these are even being developed. In some instances investors start bidding on licences even before an asset is put on the ground.”
This had not happened so far, Yayikoglu said, because private investment in the sector was relatively new: until recently, most energy and infrastructure assets were being held in state hands. As a result, a lot of LPs still had to get comfortable with building, financing and operating projects.  
“Who is investing in infrastructure in Turkey? Primarily local investors, backed by local banks. Turkish companies have developed themselves into infrastructure investors coming from construction backgrounds, and these are still the ones that are leading this market.”
Yet the opportunities offered by Turkey – as well as the global search for yield and diversification – was now triggering a stark increase in foreign interest for the market. “This over-enthusiasm sometimes results in very aggressive valuations, with competition driven by gut feeling rather than IRR-based pricing. But the market is becoming more sophisticated,” Yayikoglu said. 
Other difficulties remained. Regulatory risks, inflation consideration and foreign exchange volatility were all mentioned by speakers as being part of the equation. But perhaps the greatest challenge would be to finance the vast number of assets coming to market, Yayikoglu argued. 
“Banks now want a reasonable amount of equity in these deals, which probably wasn’t so much the case a few years ago. So the dealflow is very strong – and will continue to be so – but eyebrows are being raised with regard to the level of equity that’s being required to get these deals off the ground.”
Yet investors were slowly becoming aware of these constraints – and starting to adjust their return expectations accordingly, Sathappan concluded. “Investors are not necessarily looking for private equity-type returns in Turkey. It’s a cash flow game rather than a capital game: they’re looking for annuities or a stream of cash flows for a longer period of time. And for them, upcoming privatisation plans mean that there are enough deals in the pipeline.”