Waiting for the storm to subside

Towards the end of last year, it was a busy time for Swiss-based mid-market private equity firms. But the sense of urgency in the GP community was not in relation to new deals, exits or fundraising – all these normally core areas of activity were subdued if not effectively in winter hibernation. Effort was instead being directed to preparing portfolio companies for the economic storm to come in 2009.

Relates Capvis partner Rolf Friedli: “We held long discussions with our portfolio companies and warned them not to plan too optimistically and rather be on the cautious side. Our main goal was to increase urgency and transparency by doing scenario analyses, discussing break-even points, focusing on cash, initiating changes and developing and implementing restructuring plans in a timely way.”

The good news was that making these preparations helped to ensure that the storm, when it came, was not a great surprise. The bad news was that the storm turned out to be as bad as feared. According to the Swiss National Bank, the Swiss economy will decline between 2.5 percent and 3 percent this year, only returning to growth in mid-2010. Germany and Austria, where many Swiss GPs also invest, have had a tough time of it too – though Germany notably emerged from recession with nominal 0.3 percent growth in the second quarter.

Andreas Ziegler, investment director and head of investor relations at Zurmont Madison Management, does not expect anything other than a long haul towards eventual economic recovery – though he is spying light at the end of the tunnel. “The economy has been bad in 2009 across most sectors and we don't expect real sustainable growth until the end of next year. However, things are stabilising now and I think the psychology will therefore change. As comfort grows in the accuracy of companies' numbers, you will end up with a natural convergence of price expectation between buyers and sellers and hence more deals.”

Valuation differences have been one of the major reasons for a stalled new deal market in Switzerland. Many market participants say that now is simply not the right time to sell if you don't have to. “Companies trying to find buyers via an auction process at the current time tend to be ones that have issues; they are often distressed and under pressure,” says Lars Niggemann, investment director at CGS Management.

One area of investment that a number of Swiss GPs specialise in – and which appears to be fairly resilient to the downturn – is the buy-and-build. For example, Zurmont Madison acquired Swiss language services provider CLS Communication in July as a so-called platform investment. CLS has since acquired two competitors.

Lars Niggemann says a buy-and-build strategy entails the GP being focused on a “defined universe” of suitable acquisition targets from the time the initial investment is made – which maximises the prospect of executing deals in a market where they are generally slow to come to fruition. However, he adds that, in tough economic times, time must be spent “making sure the initial investment is ready for integration. That creates additional portfolio work”.

Swiss mid-market investors have a decidedly pragmatic view of the current climate. “We clearly see a stabilisation, but the general picture is still confusing. The behaviour of the economy is outside the range of anybody's experience,” says Friedli. “So, we will remain cautious as we do not see an upswing within the next six months.”