Prospects bright for the Swiss private equity market

With much of the pandemic-related uncertainty over and the impact of COVID-19 on companies more readily quantifiable, the prospects for the Swiss private equity market are good – especially given that sources of funding are so abundant. Here’s a brief overview of recent market developments and some pointers as to where the opportunities and pitfalls might lie going forward.

What about developments?

How did things develop on the Swiss private equity scene in 2020, a year dominated by COVID-19?

During the first COVD-19 lockdown in March and April last year many private equity transactions were put on hold, and private equity managers temporarily shifted their attention to assuring the operational and financial survival of companies in their portfolio. But the industry quickly returned more or less to normal after the lockdown measures were eased. The biggest private equity deals in 2020 were about financial investors stepping in to stabilise the situation at companies in distress. There were also plenty of mid-market private equity deals last year; what’s striking here is that around half of these transactions involved add-ons to financial investors’ existing platforms.

What challenges did COVID-19 create for dealmakers?

Travel restrictions and lockdowns in most countries required a great deal of flexibility and creativity from both buyers and sellers. The majority of management meetings and site visits took place virtually – something that a year ago would have been unimaginable. Another challenge was to understand and assess the various support and assistance measures in the relevant countries – an area where Switzerland, with short-time working and COVID loans, was exemplary.

Can 2020 be compared with the 2008/9 financial crisis?

Unlike the crisis back then, which was triggered by players in the financial industry itself, COVID-19 is the result of external factors and thus has more in common with a natural disaster. There has been no banking crisis: the financial markets have remained extremely active, and so far at least, no mistrust has arisen in terms of banks’ ability to cope with even major financing. One result of this is that financial investors such as private equity funds are currently very liquid, and have the advantage over strategic buyers that they haven’t had to steer and fund an existing business through a period of such uncertainty.

How has the COVID-19 situation affected purchase prices?

In the transactions we’re aware of there have been no signs of a fundamental COVID-19 discount. Thanks to high share prices, a liquid capital market and the urgent need of investors, in the current situation too we’re seeing attractive prices paid for good businesses. In some cases, however, we’re observing a trend to creative purchase price mechanisms such as earn-outs to offset the greater level of uncertainty.

What trends will dominate private equity in the next 24 months?

The situation at the moment is that the uncertainty on both the seller and the buyer side has evaporated, deal funding has been secured, and the influences of COVID-19 on companies can be quantified and explained. Against this backdrop we’re positive about the further development of the private equity market.

How can buyers deal with the pervasive uncertainty in the coming months?

The key now will be how quickly a large part of the population can be given access to vaccine and how soon lockdowns can be lifted. Industries that have proven resistant to the economic effects of the various lockdowns will be popular with buyers in the next few months. Companies that have profited from COVID-19, for example pharma and medtech, will be in demand with financial investors, but their ability to continue along the path of growth will definitely have to be analysed carefully in the course of detailed commercial due diligence.