Swiss deal opportunities come largely from medium-sized family businesses, which have become much more aware of private equity and look to the asset class to solve succession issues, Betschart says.
Whereas before these companies valued private equity investors for their potential financial input, they are slowly beginning to understand that they can also add value to the company’s business development strategy. The most interesting family-owned firms occupy a leading position in niche industries such as supply services, engineering or healthcare.
Although this phenomenon is not as pronounced in Switzerland as in Spain or Italy it represents a rich source of deal-flow. One of the advantages of investing in these companies is that the competition does not tend to be fierce, as most vendors will only approach a few investment professionals in order to maintain discretion.
Despite a limited number of Swiss large corporates, corporate spin-offs also remain likely acquisition targets for Swiss private equity managers.
The mid-market is also proving popular, with many funds currently oversubscribed. “There is an overflow of money targeting the low end of the mid-market,” says Jaeggi with Adveq Management. “The competition in this part of the market is so fierce that it is driving up the prices of the companies. The number of auctions is on the increase and this is not necessarily in the interests of the investor.”
Matter at Unigestion agrees and thinks this overflow may destroy the mid-market in the mid-term.
“We have to be realistic and acknowledge that most investors invest cyclically,” says Lattmann. “Unfortunately, they are reacting as indiscriminately now as they were during the boom but private equity is a long-term investment and you have to be prepared to put your money to work over a four-to seven-year time period.”
The problem with cyclical investing is that it exacerbates natural market cycles and leads to the boom and bust phenomenon that has characterised the industry in recent years. When too many investors jump on the bandwagon and make bad investments, they become sceptical about committing funds to private equity in the future, thus slowing the overall development of the industry. To change this trend, institutional investors have to learn to invest on a long-term time horizon.