The effect of the Swiss economy on PE funds

In last month’s Business Brief magazine, Jon Trigg discussed the challenges faced by some Private Equity funds following the Swiss National Bank’s decision to remove the peg that maintains a fixed conversion rate between the Swiss Franc and the Euro. Here’s what he had to say…

Last Saturday morning was relatively typical for our family. It was just after the dogs had been walked and all household jobs completed when our teenage daughter remarkably appeared from her room and lovingly asked for some money to go out with her friends.

Like a well-trained puppy and without paying too much attention I reached into my back pocket and handed over a note that had been crumpled up in my jeans pocket. Her face was one of astonishment as she unravelled a Swiss Franc note, quickly appreciating that this was not likely to be accepted at the cinema.

It was probably not the time to share my thoughts on the Swiss economy with her, in particular the resultant challenges some Private Equity funds are currently facing. Instead, I duly swapped the CHF10 note for a £10 one. I am not sure whether the smile on my daughter’s face that followed was (a) due to her understanding that she had just completed a very advantageous foreign exchange trade, or (b) because her afternoon would now be spent with her friends in town rather than with her father at home. 

Unlike my daughter, the Swiss economy has had a challenging financial year to date. The beginning of 2015 saw a return to currency volatility when on 15 January the Swiss National Bank (SNB) unexpectedly announced that it was abandoning the peg that kept the Swiss Franc locked to the Euro at a fixed rate of 1.2:1. This decision sent currency markets across the world into a spin with the Franc soaring and the Euro falling in value by over 30% against the Swiss currency.

As a director on Channel Islands domiciled Private Equity fund boards, I have experienced first-hand the effect of this volatility on those funds holding underlying portfolio companies with Swiss Franc exposure. A number of buy-out funds for which I act hold investments in small- to medium-sized Swiss private industrial and exporting enterprises. Many of these companies lack an international manufacturing or distribution platform and therefore the valuations in these companies fell significantly as exports became greatly more expensive for those in the Eurozone. 

2015 Budget forecasts and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) projections for these portfolio companies completed in late 2014 had to be reworked and remodelled by portfolio company management as the effect of the SNB actions were realised. Audit firms smiled, CFOs frowned, investors hoped any loss would be short-term.

Another fund upon which I act was able to exit a European investment at a strong value but the directors were then left with the dilemma of receiving the sale proceeds in Euro but being bound by documentation to distribute Swiss Francs to investors, thereby potentially incurring a significant FX loss on conversion. 

More widely, as a result of the SNB’s actions, the Swiss economy (GDP) shrunk by 0.2% in the first quarter, driven mainly by a marked retraction of 2.3% of the export of goods in real terms against the last quarter of 2014. However, recent data shows that the Swiss economy avoided falling into technical recession in the second quarter. GDP expanded a weak 0.2% over the previous quarter, thus recovering from Q1’s contraction. 

The small expansion during Q2 is a clear sign of the struggles that the economy is facing since the removal of the peg in January. However, in Q2, solid private consumption (partly fuelled by lower prices due to the increasing imports from the Eurozone) and government spending offset the negative impact of the strong currency on demand for Swiss exports. Moreover, the sluggish growth seen in Q2 is anticipated to be short-lived as there are brighter expectations among exporters and from within the manufacturing sector.

As to the Private Equity market, EY and KPMG both noted a significant slow-down in mergers and acquisitions activity around Swiss target companies in the year to date. Deal flow in companies remains low, however it is expected that the current environment will also open interesting investment opportunities at more moderate valuations than in the past two years for those wishing to make acquisitions. 

Furthermore, Private Equity fund managers have worked hard developing and diversifying their Swiss portfolio companies in a bid to offset the negative currency impact this year. Managers holding Swiss industrial and service companies with a diversified product and market portfolio and an intelligent production set-up (including international or outsourced production of certain parts of the value chain) are set to continue to be successful and grow.

The future for investment in Swiss Private Equity remains positive but it may take time for valuations to recover. Whatever does happen, one thing is certain: the way my children spend money, the CHF10 that remains in my back pocket will not be able to stay there as a long-term investment.


Click here to view Jon’s Business Brief article as a PDF

(This article has been reproduced by kind permission of the publication.)


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