Onwards and upwards

With private equity selling like hotcakes, it is no surprise that alternative investment specialists based in and around Zurich and Geneva are doing very well right now.

After a decade of tireless asset gathering, several Swiss funds of funds now rank among the most influential providers of private equity capital on the planet. They invest in the asset class on a global basis, and many of them have fund management clients from around the world as well. Switzerland's sizeable roster of dedicated private equity investment managers includes Adveq, AIG Private Equity, Alpha Associates, Capital Dynamics, LGT Capital Partners, Lombard Odier Darier Hentsch, Partners Group, Pictet & Cie, shaPE Capital, Swiss Re Private Equity Advisers and Unigestion Capital Partners.

In addition to working with international clients, many of these organisations also provide a natural point of contact with private equity for both institutional and retail investors in their home market. They are therefore well positioned to help gauge sentiment in a country where private equity has in recent years won back supporters who had turned their backs on it after the meltdown of 2001.

A small number of Swiss institutions such as the City of Zurich, ABB and Nestlé pension funds have been active in private equity for a long period of time. But many groups only discovered the asset class in the late 1990s when technology-related venture capital was suddenly deemed a must-have product. An army of Swiss retail investors did the same.

For many of the newcomers, the ensuing rush into private equity proved disastrous when the market collapsed shortly afterwards. One of the most high-profile failures of the period was Private Equity Holding, a listed structure that performed poorly after raising SFr1.3 billion (€822 million; $1 billion) from local investors. The company's very name helped ensure that private equity took a long and painful beating in the Swiss media, and it took years for the industry to repair its reputation among the locals.

Today, however, much of this seems ancient history. The repair work has been done, and as far as Swiss investors are concerned, private equity is back on the list of highly attractive investment strategies.

It goes without saying that the turnaround has been good to the local private equity specialists, even though most of them operate internationally and do not primarily depend upon developments in their home market.

Among the most high-profile members of this influential cast is Partners Group. Based in the small town of Baar-Zug on the shores of Lake Zurich, Partners Group has amassed assets of nearly SFr14 billion (€8.8 billion, $11.2 billion) under management – no mean feat for a money manager established just over ten years ago. The group invests in private equity, hedge funds and private debt, and has offices in London, New York, Singapore and Jersey. Plans to add a real estate platform to the business were announced earlier this year and are currently being worked on.

In March, the firm went public, garnering a market capitalisation of approximately €1.4 billion in a longanticipated IPO on the Swiss Stock Exchange. Floated at SFr63 per share, the stock rose sharply in the secondary market. At press time, it was trading at SFr99.50, a 58 percent increase on the issue price.

In late August, Partners reported an increase in assets under management of SFr2.9 billion during the first half of the year. Private equity, its largest business area, grew by SFr2.1 billion to SFr10 billion after the firm closed four new funds during the period. The firm's other platforms also achieved growth in the first half of the year, with hedge funds, wealth management and private debt contributing SFr500 million, SFr200 million and SFr100 million of new capital respectively.

Partners Group's recent success as a fundraiser reflects the firm's appeal to both domestic and international clients. According to Urs Wietlisbach, a co-founder and co-chairman of the firm, Partners is increasingly winning mandates from institutions in the US, the UK and Asia and is therefore relying less on its original core markets of Switzerland and Germany. (Other leading Switzerland-based private equity fund managers, notably Capital Dynamics in Zug and LGT Capital Partners in Pföffikon, have built similarly international franchises, making it conceptually difficult to refer to these investment houses as strictly “Swiss”.)

Widespread support is also evident in Partners Group's shareholder base. Wietlisbach estimates that approximately one third of the shares that were sold in the IPO (70 percent of the stock was retained by the firm's principals and employees) were taken up by Swiss investors. The balance went to investors in Europe and overseas.

Commenting on the company's share price since the IPO, Wietlisbach says: “About half of the shares were bought by clients of ours. Some that held on to them will have made more money than they ever paid us in fees. That's a great result.”

Partners Group is of course not the only Swiss player to have enjoyed success of late. Capital Dynamics has also grown substantially in recent years. According to its website, the firm now looks after more than $20 billion in private equity assets.

LGT Capital Partners has approximately $6.5 billion of private equity under management, an increase of $1.5 billion in the past 12 months. The firm has a number of listed private equity funds. Among them is Castle Private Equity, a listed fund investment portfolio quoted on the Swiss Stock Exchange. Launched in 1997 and managed jointly with Partners Group, Castle has invested in approximately 150 limited partnership interests to date. With a current market capitalisation of approximately $420 million, Castle has in recent months been trading substantially above $100 per share, giving the structure its highest valuation in five years.

Another private equity stock in Zurich is AIG Private Equity, a Swiss fund and direct investor based in Zug and affiliated with American International Group in New York. In June, AIG Private Equity raised SFr150 million in a capital increase, taking its total assets to SFr574 million.

According to Andrew Fletcher, a member of AIG Private Equity's management committee, the capital increase was a response to keen investor appetite: “The stock had become fairly difficult to buy, and demand for the new shares was strong, allowing us to price the deal at an 11 percent premium to the last reported NAV. For existing shareholders, this made it a very good deal.”

According to Conradin Schneider, AIG Private Equity's head of investor relations, the firm's investor base remains predominantly Swiss, with local institutions owning approximately three quarters of the company's shares. However, ownership in the group has been spreading to Italy, Benelux and Austria, and the firm is also looking to make inroads into the UK market.

Fletcher says that notable during the firm's share placement in June was “significant interest in a listed private equity product” from money managers acting on behalf of retail investors – evidence he says that there really has been a change of sentiment towards private equity in the last two years.

Florian Siegfried, CEO of shaPE Capital in Pföffikon whose share price is also on a high at present, agrees with Fletcher's point. He says: “Up until Private Equity Holding, private equity was largely unknown to retail investors here, and the problems it ran into caused a lot of damage. But now retail investors as well as institutions are recognising that you have to have exposure to this asset class. People are catching up.”

However, Siegfried also says that the domestic investor base still has a learning curve to master to fully grasp the long-term investment characteristics of the asset class. Those looking to come into the market now with a view to turning a quick profit are likely to be disappointed, he argues.

Such disappointment, if it does materialise, may well have an impact on the public market valuations of Switzerland's listed alternative asset managers going forward. Private equity is at a peak, and the possibility of a downturn is something every prudent private equity fund investor is factoring into their projections at this point.

However, none of the protagonists canvassed for this article, including those with exposure to public market sentiment, expressed particular concern at the prospect of investment performance weakening any time soon.

Strategies designed to soften the blow of a potential correction invariably rely on diversification – across products, geographies and vintage years. There may be a storm brewing, but Switzerland's private equity fund investment professionals are confident their defences will hold if and when it hits. Both at home and abroad, their clients will be hoping the same. But no one appears to be anticipating grave problems just yet.