Swiss currency move: the potential impact on private equity

Harriet Bailey
17 February 2015

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In mid-January, the Swiss National Bank (SNB) de-pegged the Swiss franc (CHF) from the euro. Harriet Bailey considers the potential consequences for private equity in Switzerland and the wider DACH region

There are two schools of thought on the impact the removal of the peg will have on Switzerland as a whole. "One camp is arguing the effects have been exaggerated," says Ralf Gleisberg, partner at Akina Partners. "The other camp is arguing this is catastrophic, even for domestic companies."

Initial reactions were strong, with the Swiss franc rocketing 40 cents to trade at CHF 0.80 to the euro, before reaching parity. "The stock exchange is short term, while private equity investors are in it for the long term," says Gleisberg. "It has been quite an abrupt change, but it will, in all likelihood, normalise."

For those looking at deals in the country, opinion is divided as to whether now is a good time to invest. Björn Böckenförde, founding partner at Zurmont Madison Private Equity and head of SECA's private equity chapter, says: "The demand for Swiss investments has been strong; we are seen as a safe haven. Independently from any other thoughts, if you want to acquire a company because it is a perfect strategic fit then the exchange rate plays a minor role."

Indeed, those with portfolios only comprising Swiss assets, which only focus on the domestic market, will have seen their assets appreciate by around 15%. However, this is rarely the case: "Switzerland is an export-oriented country with a high number of small to medium-sized companies. They provide the backbone of the Swiss economy – 60% of their products are being exported solely to Germany," says Böckenförde.

However, rising prices and a weak euro are likely to affect underlying revenues. "From this point of view, we should expect the de-pegging to have an impact in the short term. Portfolio companies will be under pressure if they are export-driven," says Gleisberg.

Euro replacement
Investors are likely to tread with caution before signing off on Swiss deals in the coming months, as transactions take on another layer of complexity following the SNB's shock move. "The question is how much of the Swiss franc-based value chain can be replaced with euro costs," explains Böckenförde.

In the short term, bolt-on acquisitions and merger activity could see an upsurge as funds attempt to regain recent losses. "Funds will try to develop their portfolio companies towards less Swiss franc-dependent markets and may consider shifting labour-intensive production to the EU. Swiss companies will need a stronger footprint in the euro region," says Böckenförde, who cites Zurmont Madison's portfolio company Bauwerk Parkett as an example of how to shift the value chain.

The private equity house initially acquired a 55% stake in the parquet flooring manufacturer in October 2009, before merging it with Norwegian competitor Boen in March 2013. "We did this anticipating that the Swiss franc could not remain as protected as it was by the SNB, and decided in 2010 to reduce dependency on the Swiss franc currency development," says Böckenförde. "Outsourcing some labour costs and sourcing raw materials in the euro area means the predominantly Swiss franc-based value chain is diminished. You can compensate your losses further by innovation and automation."

However, activity in Switzerland naturally has a knock-on effect on its Teutonic neighbours. If investors turn away from the troubled Swiss economy and look to the wider DACH market, private equity funds could face rising competition. "Those pan-DACH programmes that have predefined geographical criteria will be under pressure. The more flexibility you have in your programme, the better." says Marc Brugger, managing director at LFPI Group. "We have five to six deals currently cooking in Germany. My feeling is that there are many deals to be made – maybe more than last year – and I see no shortage of German assets."

Growth setback
In growth terms, Swiss companies could face a setback of up to two years, according to Böckenförde. For funds in mid-cycle, there is likely to be a residual effect from January's events – at the divestment stage holding periods will likely be above the norm. "If you have an EBITDA today of x and you suddenly suffer a decrease of 15% overnight, any growth in EBITDA you experienced will be negated by the loss in the exchange rate. You will lose maybe a year's worth of profit," comments Böckenförde.

As far as long-term effects are concerned, investors are optimistic about the robustness of the Swiss economy, with Gleisberg stating he sees "no impact on future deals. For a fund dealing in Swiss Francs and buying a company in Switzerland, the effect will be neutral." Even for investments from euro-denominated funds – the majority – GPs are confident in the ability of Swiss companies to weather the de-pegging storm through better efficiencies and creative thinking.

Key Switzerland-based buyout funds:
How will the main Swiss buyout funds fare with the removal of the currency cap?

CGS and Zurmont Madison may have seen their assets increase in value as the Swiss franc has appreciated. Their outgoings in Swiss francs may well outweigh any revenues generated in the Eurozone.

On the other hand, Argos Soditic, Capvis and Invision will face different challenges with their euro-based funds. They will be more resilient when it comes to discrepancies between costs and profit, but may find their money does not go as far when it comes to investing in the near term.

Euroknights VI – Argos Soditic
• €400m buyout fund closed in December 2010.
• Investment focus: Small and mid-market companies across Europe.

Capvis Equity IV - Capvis Equity Partners
• €720m buyout fund closed in January 2014.
• Investment focus: Mid-size companies in the DACH region. The fund has already completed three deals out of a possible 10 investments.

CGS III - CGS Management
• CHF 208m buyout fund closed in April 2013.
• Investment focus: Buy-and-build projects in technology-based small and medium-sized industrial companies. Acquisition targets will usually be found in the DACH region.

Invision V - Invision Private Equity
• €285m buyout fund closed in July 2013.
• Investment focus: Mittelstand companies in the DACH region, particularly in the IT, telecom, financial services and media sectors.

Zurmont Madison Private Equity LP - Zurmont Madison Private Equity.
• CHF 250m buyout fund closed in December 2008.
• Investment focus: MBOs, MBIs and corporate carve-outs in the DACH region. The GP has already made two divestments from the fund, with a third due to take place in the coming months. Zurmont Madison will look to begin fundraising for its second fund in Q3 2015.