Swiss PE optimistic despite concerns over investment conditions

Julian Longhurst
25 November 2016

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Fears over liquidity and pricing were prominent among PE practitioners at the recent Mergermarket Swiss M&A and Private Equity event in Zurich, though confidence in the asset class remains. Julian Longhurst reports

Following a morning programme focusing primarily on M&A-related themes in the Swiss market, the attention of afternoon sessions at Zurich's Dolder Grand Hotel shifted to the fortunes of the local private equity specialists.

In one particular panel, local GPs Ralph Wyss of Gilde Partners, Guy Semmens of Argos Soditic and Ralf Flore of Ufenau Capital joined together with LPs Kaarina Suikkonen of Lyrique and Ralph Guenther of Pantheon to discuss private equity deal-making in the Swiss and European markets.

The reality is that really good businesses are going for eye-popping prices; the averages hide a multitude of sins"

The focus of the discussion quickly turned to the challenges practitioners are facing in the current environment and singled out the issue of growing liquidity as particularly important. Driven by increasing institutional allocations to both private equity and private debt, the level of available capital in the DACH market is at its highest level since the financial crash of 2008/09, yet deal numbers are still well behind, with pricing suffering as a result, the panellists said.

Arm and a leg
The trend of too much money chasing too few deals is not a new one, but the consensus among the panellists was clearly that the trend towards ever-increasing prices is not sustainable in the medium term; as one GP quipped, "We all know how it ended last time..." Another GP expanded on the issue further: "You might see headline entry multiple averages of 9.5x or 10x in the mid-market, but the reality is that really good businesses are going for eye-popping prices; the averages hide a multitude of sins."

However, in spite of these concerns, the mood of the panel was more upbeat than it might have seemed at first. As one of the LP panellists ventured, private equity is still the best asset class for returns and many of the issues that the market is facing at the moment are more to do with the industry becoming a victim of its own success, rather than with any fundamental failure.

The LP explained: "GPs are very aware of the pricing problems and have improved their 'tool kits' accordingly, focusing on the value-add." Another panellist agreed: "Simply put, GPs are better than ever at selecting targets, managing the investments and, most importantly, aligning their interests with those of the investees' management teams."

There are other factors mitigating against the dangers of escalating prices in the Swiss and surrounding markets: to begin with, local leverage levels have not come close to reaching the highs seen back in 2007. Also, for the Swiss market specifically, changes in the banking environment in recent years may also have a positive effect on the PE community; private equity has historically been negatively correlated to the strong local banking market, but as the banking fraternity has weakened in the face of regulatory pressures, opportunities are likely to open up to well-placed local GPs.