Switzerland: A mountain to climb?

Switzerland is one of those markets that usually has very little to complain about. Its economy has largely escaped the woes that have afflicted the majority of its European neighbours, and continues to outperform most of its neighbours: the growth rate is about 2 percent and unemployment is just over 3.2 percent, while the country can still boast a budget surplus and a strong banking system. And since Switzerland is part of the broader German-speaking market, investors have looked on it favourably for years.

Yet despite these strong fundamentals, operating in Switzerland’s buyout market has not been straightforward in recent years.The currency has been part of the problem. Back in 2011, when doubts over the future of the euro were at their height, investors piled into the Swiss franc; it subsequently soared in value, making products from export-driven Switzerland unattractively expensive.

While the currency has stabilised since, it remains an issue, GPs say.
“Due to the strong Swiss Franc, the costs of running a business in Switzerland can be higher; so you need to cope with that by ensuring that part of the production is abroad,” says Rolf Friedli, managing partner at Capvis.

“The Swiss Franc is set at €1.20, which causes a lot of problems for some of the exporting industries,” agrees Frank Becker, managing partner and chairman at Invision. “We have a company in the hospitality [sector] that is very resilient because that is one of the hallmarks of Switzerland. We also have a software company where we have used some operational hedging to mitigate the currency risk. So we have been affected by the strong currency but have reacted to the situation.”

As well as keeping an eye on the currency, investors are also closely following the current political crisis in Ukraine, according to Rolf Lanz, managing partner at CGS Management. “The situation in the Ukraine is affecting both Germany and Switzerland, although Germany is more affected because it is doing trade with Russia, while Switzerland is more focused on Asia. On the other hand, Germany is the biggest export country for Switzerland. So in the short term, the Swiss economy will also be affected.”

TOUGH TO BUY

This could be bad news for the country’s buyout market, especially since deal flow is already sluggish. In the first nine months of the year, there were only nine private equity deals in Switzerland, according to data from Mergermarket. That’s a stark contrast with 2013, when 23 deals were completed across the year.

“Company owners are reluctant to sell,” says Björn Böckenförde, chief financial officer and founding partner at Zurmont Madison Private Equity. “For them it becomes more attractive to keep their company and earnings, because all other investment alternatives are less attractive due to low interest rates. [So] deal flow for primary investments is still weak.”

This view is echoed by Friedl. “Deal flow is not as strong as it was pre-crisis. I think industrial buyers have been more active and have picked up some of private equity[’s] deal flow.”

One high profile Swiss deal this year was Kohlberg Kravis Roberts’ investment in Ringier, a Swiss media business. KKR bought a 49 percent stake in each of Ringier’s digital subsidiaries for $175 million, according to a source familiar with the matter. The deal negotiations lasted six to nine months, KKR said at the time.

While Switzerland has some great investment targets, it’s not an easy market to operate in, according to Lucian Schoenefelder, a director at KKR. “Many of the family-owned businesses in Switzerland and Germany choose their partners very carefully,” he explains. “They often don’t necessarily need capital but are more interested in expertise and value-add partnerships. It’s not easy to do those deals, as they are based on relationships and trust.”

CGS’s Lanz agrees. “There are many hidden champions that don’t necessarily want to sell out completely, but which feel the pressure to internationalise their businesses – and we can help them there. Striking deals with some of the entrepreneurs definitely takes longer, because you push a different way of thinking to them.”
One consequence of this dearth of deals is that valuations tend to be quite high. “This year, it looks like the valuations have been slightly higher compared to the average European acquisition prices,” says Bruno Mory, a senior vice president and investment director for private assets at fund of funds manager Unigestion.

Lanz agrees. “On the one hand there are good exit multiples, but it’s challenging to pick up good performing businesses for a relatively good price. In addition, there aren’t that many companies on the market. It’s therefore important to be able to source proprietary deal flow.”

Most GPs agree that prices are frothy. Like almost everywhere in Europe, high valuations are driven by stock market valuations and freely available cheap debt, Friedli says.
Adds Invision’s Becker: “Lots of transactions don’t go through in the end because the prices are too high for the quality of the business.”