Question of structure
In the past Swiss institutional investors tended to invest in private equity either via international funds of funds, Swiss-listed vehicles or local funds, often because they were not familiar with the asset class. But Tycho Sneyers, a partner at LGT Capital Partners fund of funds, has noticed a shift in favour of Swiss funds of funds. He says: “A big concentration of market players in Switzerland are very active locally.”
The Swiss funds of funds industry has come a long way since the late 1990s when Unigestion launched its Unicapital in partnership with Pictet & Cie, and Partners Group launched the listed Castle Private Equity with Liechtenstein Global Trust. The funds of funds industry is now marked by a growing number of competitors, with the approximately 35 worldwide in 1996 rising to around 134 today.
According to figures compiled by Asset Alternatives, Venture Economics and Almeida Capital, in the first nine months of 2004 funds-of-funds accounted for around 18% of private equity funds raised in Europe compared with only 10% in the US. This has led to suggestions that the market is saturated. Indeed, some private equity players have remarked that only half the current number of funds-of-funds in Europe is really necessary.
As the home of so many funds of funds, there is a natural and fierce competition among these vehicles in Switzerland.
Consolidation has effectively already taken place as the Swiss funds-of-funds industry is dominated by a handful of players such as Adveq, LGT Capital Partners and Unigestion. Yet the less successful funds of funds remain on the market and are not likely to disappear overnight as they still have substantial sums of capital leftover from previous rounds of fundraising.
The majority of Swiss investor capital is committed to primary funds-of-funds with a small amount allocated to funds with a clear objective of buying secondaries.
Switzerland’s prominence in the funds-of-funds industry means it is well positioned to develop secondary funds-of-funds. The density of private equity investors in Switzerland also means there are plenty of deal opportunities. Secondary investments are particularly important for listed funds of funds, which are under pressure to put capital to work straight away.
But Stephan Matter, executive director at Unigestion , says: “There is a danger that investors will see secondary funds as the ultimate investment opportunity and the solution to all their problems. This, in turn, may lead to an exaggerated sense of euphoria in this segment of the market. There is already too much money in secondaries, which is putting an upwards pressure on prices.”
“Investors who are starting a private equity programme have a tendency to choose secondary funds as they need the earlier cashflows that these can provide,” notes Jaeggi.
“Liquidity is a tremendous consideration for anyone starting to invest in private equity. But secondaries can disappoint and it is important for investors to ask themselves what they are really buying. “Buying at a discount is not necessarily synonymous with buying cheap. Often, the likelihood of investing in secondaries goes down as the investor’s level of experience goes up as they don’t need as much liquidity,” he says. In fact some industry commentators blame secondary deals for the J curve pattern of private equity investing.
Private equity funds in Switzerland can be captive, independent or international funds. They may be fundraising for investments in or outside of Switzerland, making direct investments or investing in other private equity funds. They seek to raise funds from Swiss investors or international investors represented by Swiss banks, asset managers or family offices. Swiss companies frequently advise these funds, recommending investment strategy and reviewing potential investments for the investor or the manager.
The principal structures used for private equity investment vehicles are the investment company and the foreign limited partnership. The limited partnership often used in other countries and the US limited liability company do not exist in Switzerland as yet.
According to EVCA, the principal source of additional capital in 2003 was independent funds, while funds raised by captives went down dramatically. Most funds raised came from within Switzerland, with 72% of capital raised domestically and 28% raised in non-European countries. Pension funds accounted for 34% of funds raised, while banks and funds of funds contributed 33% and 30% respectively.
A defining characteristic of the Swiss market is the variety of innovative funds-of-funds structures available to investors. The Luxembourg regulated mutual fund structure is widely used in Switzerland and is said to be better than an offshore fund. It makes the initial move into the asset class easier for new investors as they are already familiar with the structure. Funds of funds managers have also developed unconventional fund structures.
In 1999 Partners Group launched a listed fund that was the first private equity investment vehicle with capital protection provided by Swiss Re. In the past, Partners Group has also offered a fund structured as a tradable certificate, allowing private investors in Germany access to the product.
Following the creation and listing of these vehicles in the late 1990s Switzerland has an active listed private equity market. These listed private equity vehicles are often appealing to first-time investors in the asset class. Swiss stock corporations are used for private equity purposes. Ordinarily, a standard Swiss holding company (known as a ‘societe anonyme’ or ‘aktiengesellschaft’, he says) is set up as a two-layer structure with a wholly owned offshore subsidiary. It collects funds by issuing shares to the public and the investments in the targeted private equity investments are then made through the captive offshore intermediary holding company. Companies structured in this way are listed on the Swiss stock exchange, in the investment companies
According to Hans Van Swaay, a partner at Swiss bank Pictet & Cie, quoted funds are often a gimmick and can be very expensive. “In order to reap the returns of investing in private equity, investors must be committed for the long-term,” he continues. “They cannot expect to avoid the issue by investing in quoted funds.”
Other steps taken by funds of funds managers to give them a competitive edge include increasing their investment specialisation. Investment strategies differ greatly depending on the size and level of maturity of each individual fund. But generally investor allocations have tended to move away from the one-size-fits-all mentality. It appears that a service culture is emerging in Swiss funds of funds with a greater demand for tailored solutions. Yvonne Stillhart, a principal at bank subsidiary Lombard Odier Darier Hentsch, says: “In general, investors prefer more focused offerings and look for more specialised programmes.”