The challenges lying ahead
It is clear that, like the rest of Europe, Switzerland is witnessing a revival in private equity activity, with the result that Swiss industry commentators are optimistic about the future development of the asset class. “The growing acceptance of the asset class will lead to higher-quality dealflow,” Peterson says. “Growth capital will become increasingly attractive now that banks are more reluctant to offer certain types of loans in the wake of Basel II.”
The number of investment opportunities, particularly in buyouts, will also increase due to the improved profile of the asset class. It is likely that the largest buyouts will continue to be carried out by large international funds that do not need a base in Switzerland to close a deal. In fact, Pictet’s Van Swaay feels there is room in the market for more small buyout groups.
However, due to the small size of the market we are unlikely to see a large number of deals in Switzerland and investors will continue to look beyond Swiss borders for dealflow. Burger-Calderon of APAX says: “The Swiss private equity market is attractive if you want to raise money but isn’t as attractive if you are looking for investment opportunities.”
At Advoq Jaeggi thinks that private equity is about to replace certain kinds of bank loans. “We will see more public-to-privates as there are currently too many companies on the Swiss Stock Exchange,” he says. “Inevitably, this will lead to a certain amount of portfolio restructuring opportunities.” It appears that recent regulatory developments will also favour the development of public-to-privates. “Until recently, if a private equity manager wanted to buy a listed company it had to control 98% of the votes before the company could be delisted,” Peterson says. “Now, following the new Swiss merger law, the general partner only has to own 90% of the votes before the company can be delisted. This innovation will doubtless lead to an increase in the number of public-to-private deals closed in Switzerland.”
Venture capital funds, hit hard by the hitech bubble, will begin to revive with most institutional interest focused on life sciences, biotechnology and watch-making, where Switzerland has natural advantages. By contrast, high technology will struggle due to the lack of a ‘natural’ IT sector in the country.
“Private equity and venture capital are the necessary instruments to revitalise the European market, which is currently in the doldrums,” Letmann says. “In the long term they will play an increasingly significant role in the development of the economy.”
At Leman Capital Betschart says: “The venture capital segment of the market, which has been on a slow burner, will grow substantially over the next few years.” New companies are being created and are being assimilated through the technology institutes of Lausanne and Zurich and a limited number of venture capital opportunities are beginning to emerge. Letmann adds: “We are beginning to see the emergence of an entrepreneurial culture in Switzerland. The recent economic stagnation has raised the status of being an entrepreneur.”
Stillhart is optimistic about the future: “Switzerland will continue to be a strong area in the private equity market, especially from an investor perspective.” LGT’s Sneyers says: “As their level of knowledge and education about the asset class increases, investors will use a more sophisticated best of breed approach to select their managers and construct their portfolios.”
Meanwhile Matter thinks that institutional investors in Europe have become more careful when it comes to investing in private equity. “Swiss institutions have become more realistic and understand the risk/return nature of the product,” he says. “They now see it as a serious element of their asset allocation.”
Betschart says: “As an industry, we have had to educate people and overcome suspicion and prejudice but the result is that private equity is now more known and accepted as an asset class than before.” He thinks private equity will continue to grow, albeit it in an evolutionary rather than a revolutionary way.
Monetary and political stability, top educational institutions and researchers, a large availability of funds, a strong financial system and the emergence of new entrants to the market such as small pension funds, mainly through funds-of-funds vehicles, makes for a dynamic, if underdeveloped, private equity market in Switzerland.
In the past, the Swiss private equity market was held back by the Swiss tendency to be risk-averse (presumably due to the country’s long-standing banking tradition, which favours a conservative approach to investing) and its investment in private equity as a fraction of its GDP is still lower than in many OECD countries. Yet, it appears that initiatives undertaken by the government and the private equity community have led to an advancement in the level of education and acceptance of the asset class among both institutional investors and the family owners of the most popular acquisition target: the mid-sized company.
It is to be hoped that the global trend for institutional investors looking to meet their asset liabilities will result in a greater interest and investment in the Swiss private equity market, thus enabling private equity practitioners to capitalise on the dormant opportunities to be found in the country.