Switzerland has, by most standards, weathered the global financial crisis pretty well. Yet its relative economic strength has also resulted in one very serious drawback: with the euro plummeting and doubts surrounding the dollar and the pound, investors have been piling into the Swiss franc as a safe haven, causing it to appreciate hugely in the last year. That’s terrible news for an economy like Switzerland’s, where exports account for more than one-third of GDP; suddenly its goods and services are much more expensive – and therefore much less attractive – than they were 12 months ago.
Indeed, the situation got so bad – the euro almost reached parity with the franc in August, having been worth 1.50 francs in 2009 – that in September, the Swiss central bank waded in and promised to buy “unlimited quantities” of foreign currency in order to prevent the euro falling below 1.20 francs. It’s a bold move, and hard to know at this point whether it was the right one; it may just turn out to be expensive, inflationary and ineffective.
As a result of all this, the last year has clearly been a difficult one for private equity fund managers in Switzerland. Although the country is probably best known in industry terms for being home to some of Europe’s leading advisory groups and limited partners, with a well-attested ability to provide insight and analysis on global trends, there are also a number of active domestic funds and some potentially attractive investment prospects. But how do you do deals amid uncertainty and volatility like that?
Switzerland could never be described as a hotbed of direct investment. There have been just seven buyouts in the country in 2011, according to data provider Dealogic, down from a high of 22 in 2006. In deal value terms, the market reached its zenith in 2007 with $4.5 billion-worth of deals. But activity is notoriously lumpy, and, as Dealogic pointed out, local players are often loath to reveal enterprise values, making the situation hard to quantify exactly.
Big deals do happen. In September, European private equity group Bridgepoint fought off a number of rival bidders to acquire sports marketing company Infront Sports & Media from investment firm Jacobs Holdings, Martin Steinmeyer and The Junkermann Group, for more than €550 million. The last 12 months have also seen the biggest buyout on record in Switzerland, according to Dealogic: CVC Capital Partners’ $3.25 billion acquisition of Sunrise Communications in September 2010. French firm PAI Partners’ $912 million acquisition of Swissport International last November also made it into the all-time Swiss top 10. However, the country has only ever had seven $1 billion-plus transactions; in general, deals tend to be in the small- to mid–cap range.
“The Swiss economy is a bit different from other European economies,” explains Steffen Meister, chief executive of Partners Group, a Swiss-headquartered alternative investment manager with €20 billion in investment programmes under management. “There is a segment comprised of very big corporates. And there are a few deals at the mid-market level, where you tend to see interest from pan-European firms. But outside of that, there are a lot of much smaller companies. A lot of our potential dealflow would happen in that segment, but most of the companies are too small to be of interest to us – they are more suited to smaller, local GPs.”
It is these local players, then, that have experienced the problems caused by the appreciation of Switzerland’s currency more keenly than anyone. “The franc increased in value over 30 percent over the last 10 months. That’s a huge challenge,” admits Werner Schnorf, chief executive at Swiss mid-market firm Zurmont Madison Private Equity. “We just didn’t know where the exchange rate was going to be. This of course makes it very difficult for investments, for pricing, and for import/export costs. And in the M&A market, it means that potential sellers and buyers have difficulty judging the future so they are not in the position to sell or buy.”
The crisis in the neighbouring eurozone has exacerbated this problem, says Rolf Friedli, a partner at Swiss mid-market firm Capvis. “We expected an interesting market in 2011. The outlook was good and the picture was improving. But when the financial crisis got worse in Q3, some deals were pulled. Volatility and uncertainty make it difficult for owners to sell companies.”
The appreciation of the currency has at least provided firms like Zurmont Madison, whose funds are denominated in Swiss francs, with a source of competitive advantage. “It is a good environment,” Schnorf accepts. “You have 20 to 30 percent more power in purchasing. Of course, when we purchase in Switzerland as a Swiss franc fund, this doesn’t matter. But for funds outside of Switzerland, it became considerably more expensive to purchase a Swiss company. So we have less competition at the moment in Switzerland, just because of the exchange rate.”
But the problem has been a shortage of good quality deals, says Andreas Ziegler, a partner at Zurmont Madison. “There are not too many on the market today. We see some reluctance from the sellers because of exchange rate uncertainties and maybe also economic expectations.” The firm has completed two deals this year, but both were proprietary situations. “We have to dig deep and look hard to find those quality deals, and also spend time with those corporations and sellers,” says Ziegler.
“Even more than in the past, to do deals in Switzerland it is very important to be well–connected with the owner base of midsize companies,” adds Schnorf. “Private equity companies that are not well into the industrial network in Switzerland will have difficulty sourcing companies here.”
Friedli agrees that good opportunities are currently in short supply. “Potential sellers are less likely to sell at the moment,” he says. “They want to get profitability back up. There is insecurity about the economic outlook and the financing, so it is not a great time to sell companies. That is why we do not think activity will pick up significantly in the next few months.” There are exceptions, he suggests. “In general, companies that are well positioned, have pricing power and are internationally-oriented with exposure to emerging markets – they can still be sold, but to get the financing in place requires a lot of time and effort. We hear that a lot of projects are on hold again.”
WAIT AND SEE
Switzerland plays host to six of the world’s 50 largest funds of funds (based on assets under management), many of which have built an enviable reputation for their expertise and ability to generate returns. Swiss asset managers are therefore ideally placed to comment on the current economic turmoil – and, specifically, to assess whether the Swiss National Bank’s move to stabilise the currency will have the desired effect of boosting economic activity in Switzerland.
“It’s an understandable move by the National Bank given the pressure it’s been under,” says Partners Group’s Meister. “The appreciation of the franc has made life very difficult for Swiss companies, particularly those that are export-focused. It’s a very extreme situation which has been masked to an extent by Switzerland’s GDP growth, which I know surprised some people. Some businesses will welcome the €1.20 mark with relief – for others, it won’t go far enough.”
Petr Rojicek, a partner and chief investment officer at Zurich–based asset manager Alpha Associates, agrees the franc has been overvalued. “There has certainly been a flight to safety, and that has been driving its value up. That in turn has had a detrimental effect on Swiss exporters and the tourist industry.” But he doesn’t believe the central bank’s move will actually have a huge impact on private equity. “I don’t think it will have much effect on the industry. The current strength of the Swiss franc is not sustainable in the long term, and private equity is by its nature a relatively long term asset class.”
The general consensus was that finding a solution to the eurozone crisis was the more pressing issue. According to Meister, the current situation is affecting investor appetite – but only to an extent. “LPs in the US and Asia, for example, are probably a bit more hesitant, and they’re asking more questions about the situation,” he says. “But there’s no sense that they would stop investing in euro-denominated or European funds. In fact, the situation may work in private equity’s favour – investors are probably more keen to invest in the real assets private equity firms manage than financial instruments.”
Rojicek agrees that the medium-term impact will be limited. “The true test will be the next generation of funds coming to market over the coming year. Anecdotally, some investors have been less than positive about Europe, but I don’t think that will translate into reduced commitments to European funds”.
However, the eurozone woes may yet have a worse-than-anticipated impact on portfolio company performance, Meister cautions. “Our view today is that after the very low growth rates in Europe, there will be stagflation at some point, which we’ve factored into our models. We haven’t priced in a double-dip recession. If we see a dramatic change, similar to 2009, then we would have to look at our return expectations.”
In the meantime, Swiss asset managers are getting on with what they do best – trying to find the best place to invest their clients’ money.
“We take a pretty opportunistic approach to investing,” says Meister. “Things change so quickly these days – valuations in Latin America for example, have risen very sharply. As a result, it’s tough to be focused on a particular sector or region, especially given the current level of volatility.”
Some managers are looking at Eastern Europe, according to Rojicek of Alpha Associates. “We continue to be very positive about Eastern Europe, which is why we are about to launch our fourth fund focused on the region. One of the reasons we like it is the supply of capital there is relatively thin, and it’s also enjoyed comparably strong GDP growth,” he said. Others are looking further afield; Swiss manager Capvent has made Asia a core focus, for example.
But in Switzerland, as with most of the neighbouring eurozone, the immediate outlook remains uncertain – and it probably will remain so until a solution is found to the euro crisis. As Friedli of Capvis puts it: “We are on a critical path at the moment, but it will take some time until the picture clears up. In the meantime, I do not expect activity to pick up quickly”. In the mean time, firms in the country will just have to bide their time.
Clare Burrows contributed to this report