Small but resilient

While Switzerland’s private equity market has not operated totally like clockwork during the financial crisis, it may be about to tick up.

In terms of direct private equity activity, Switzerland remains a relatively small market dominated by a small handful of local players. It is over-shadowed by the large fund of funds and advisory universe that calls the nation home. Such is the compact nature of the direct investment market, that participants will often raise their eyebrows at the prospect of reporting on highlights of the year’s activity.

After some quiet years during the financial crisis, this year some transactions have closed that have created a bit of public attention

Christoph Gisler

As with many other European countries, things ground to an almost-halt during, and in the wake of, the financial crisis. Only eight deals were completed in 2009, according to financial data provider Dealogic, compared with 18 deals in 2008. In terms of fundraising, EVCA figures show Swiss private equity firms corralled €907 million in 2009, representing a 73 percent drop from the previous year’s €3.3 billion.

However, some, like Christoph Gisler, director of business development for Switzerland at private equity investor Capital Dynamics, feel things are now picking up. “After some quiet years during the financial crisis,” says Gisler, “this year some transactions have been closed that have created a bit of public attention.”

Uptick; This year has seen a
return to investment activity

According to data provider Dealogic, this year has so far seen a material increase in deal activity from 2009, with a combined total of nine deals worth $217 million.

Zurich-based mid-market firm Capvis Equity Partners acquired a majority stake in coffee-maker Kaffee Partner for €200 million in May. Capvis also partially exited its 80 percent stake in Swiss food maker Orior, which it listed on the SIX Swiss Exchange in Zurich via an IPO in March – the first in Switzerland since pharmaceuticals group Mondobiotech listed in August 2009.

And in July, Zurich-based 3i spin-out Cross Equity Partners, which invests in SMEs in Switzerland, Germany and Austria, completed a management buyout a majority stake in Spirella, a Swiss manufacturer of bathroom accessories. 

However, some deal processes have stalled or never even begun. Andreas Ziegler from Zurich-based private equity investor Zurmont Madison relates how his firm was in the process of acquiring an unnamed Swiss watch-maker when the deal stalled after “some succession and financing issues” prevented both sides from reaching terms.

Ziegler notes that very few sales processes of any kind have been taking place in Switzerland, with those that have mainly being strategic deals.

On the financing side, however, disruption to normal business has not be too severe, say market participants. In October 2009, Zurmont Madison completed the acquisition of 55 percent stake in Swiss parquet flooring company Bauwerk Parkett, a deal financed with more than a CHF 50 million (€39 million; $51 million) debt package from Swiss bank Zuecher Kantonalbank, along with two other smaller regional banks.

Large LPs are approaching us these days, including British and other internationally significant investors

Andreas Ziegler

Despite a short blip where banks were more frugal than usual, “not much has changed” since the financial crisis, according to Patric Klees, investment director at Capvis. Since Swiss banks were not lending as aggressively as their counterparts in the Anglo-Saxon world before the crisis, they have not as a result been as constrained since. 

CRYSTAL BALL

When asked for their outlook for the next year, Swiss private equity professionals cited numerous reasons to be bullish in spite of the relative quiet in the deal market.

Zurmont Madison’s Ziegler expects a round of fundraising during the next year amongst larger players, with interest in Swiss funds brewing amongst some foreign LPs. “Large LPs are approaching us these days,” he says, “including British and other internationally significant investors.” Ziegler says Zurmont is halfway through investing its current fund and will start a new marketing effort by around the middle of next year.

A current post-financial crisis “transitional period” is now under way, says Ziegler, who expects some of the smaller buyout firms to struggle to fundraise. “That will be part of the consolidation process that will happen in Switzerland,” he says. “And it is one where I expect that some of the smaller shops or players – which are really very small by international standards – will be going away.”

Other market actors note continuing improvement in deal activity levels. Lars Niggeman, investment director at Swiss private equity house CGS Management, observes an increase in “interesting and healthy targets” on the table compared to a year ago, with increased M&A activity and more corporate spinoffs taking place.

Furthermore, with the Swiss government reporting a budget surplus in 2009, and unemployment, though high by Swiss standards, currently at 4 percent – compared to 6.9 in Germany and 7.8 in the UK, for example – the macroeconomic indicators appear positive.

One danger from the macroeconomic side, however, warns Ralph Aerni, chief investment officer at Swiss advisory firm Strategic Capital Management, would be Switzerland’s reliance on exports. A strengthening of the Swiss Franc, in particular against the Euro, would dampen exports to main trading partner Germany and other buyers of Swiss exports in Europe.

With a generally robust economic position and a small, but established group of local GPs ready to pounce on opportunities, the Swiss mid-market’s future seems likely to keep ticking over.