In the private markets, private equity is a fascinating area that offers lucrative opportunities for investors. Based on historical data, private equity investments typically have higher expected returns compared to global equity portfolios, for example.
As a financial center known for its stability and innovation, Switzerland offers a thriving landscape for private equity investment. While this has traditionally been considered an area of activity for institutional investors, there is growing curiosity from private investors looking to benefit from this powerful asset class.
But is this asset class really a viable option for the discerning private investor? Today, innovative asset managers allow private investors to enter with manageable minimum investment amounts, enabling them to further diversify their portfolios.
Contents
The most important facts in brief
- Private equity: A growing market.
- Private equity means private equity capital.
- The investment is not tradable on public trading venues.
- Private equity enables above-average returns.
- Pension funds also invest successfully in private equity.
- Access was previously restricted to institutional investors – investments are now also possible for private investors.
Private equity: A brief explanation
The two words private and equity already describe in their translation what it is all about: private equity. Private equity specifically means investments in companies that are not currently listed on the stock exchange. The trading places are therefore private markets. These are investments in which investors invest directly in companies in order to generate long-term profits. In contrast to listed equity investments, private equity investors usually have a significant influence on the management and business strategy of the companies.
How private equity works
Specialized private equity funds have emerged as the most attractive way to access these investments. These funds are also often referred to by the term private equity.
An investment in private equity takes place in several phases:
First phase: Fundraising
The private equity company collects capital from investors in order to use it to invest in companies.
Second phase: Investment
The private equity fund uses the collected capital to acquire stakes in companies.
Third phase: Investment management
The private equity company implements strategies to increase the value of the company.
Fourth phase: Exit
The investments are sold and the profits are distributed to the investors.
Differentiation from other forms of investment
Compared to other forms of investment such as stocks or bonds, private equity investments aim to achieve long-term business success. Investors often have direct influence on the management. In contrast, shareholders have only indirect influence on management.
Another important difference is that private equity investments are made outside the public market. This means that the investment cannot be liquidated on a public market in the form of a sale.
You can find out more about the background to this in our article “Private equity: background to off-market equity capital”.
Private equity: The market reaches Switzerland
In Switzerland, listed companies represent only a small percentage of the entire economy. The larger part of the economy consists of small as well as medium-sized companies, which are not listed on the stock exchange. These companies can raise capital through private equity and thus expand their business activities. At the same time, this opens up interesting investment opportunities for investors with an affinity for risk.
In Switzerland, the private equity market has grown strongly in recent years. According to the research firm Preqin, private equity managers domiciled in Switzerland have increased their assets under management more than sixfold since 2008. This shows the potential of this market for private individuals as well.
According to the Private Equity Trend Report 2023 by PwC Switzerland, digitalization and sustainability are the key value drivers for the industry. Digitization is emerging as a central lever for value creation.
Switzerland represented in the market with competent players
Large private equity firms in Switzerland include:
- Ufenau Capital Partner: the provider has been successful in business with SME investments in Europe since 2011. More than one billion Swiss francs are now managed for investors in Pfäffikon.
- Partners Group: The group is one of the pioneers of the Swiss private equity industry. 25 years after its foundation, its assets have grown to 127 billion dollars. Today, 1,500 employees work for Partners Group in 20 offices.
- Capvis: The experts from Baar develop small and medium-sized companies into global champions. Capvis has invested over 3.5 billion euros in more than 61 investments over the past 30 years. Started as the PE division of Swiss Bank Corporation, the company broke away from UBS in 2003.
- LGT Capital Partners: some 650 employees manage over $85 billion in assets at twelve locations. The provider is a leader in alternative investments and does about 90 percent of its business outside Switzerland.
- EQT: The private equity firm was founded in 1994 in Sweden, where its head office is still located today. EQT has grown into a huge private equity firm within three decades. It currently holds about 70 investments.
Legal framework in Switzerland
The legal and regulatory framework for private equity in Switzerland comprises various laws, ordinances and supervisory authorities.
In particular, Swiss financial market law contains regulations applicable to the activities of private equity firms. For example, the Swiss Federal Act on Collective Investment Schemes (CISA) regulates investment funds, including private equity funds. The CISA is subject to supervision by the Swiss Financial Market Supervisory Authority (FINMA).
Swiss pension funds successfully use private equity
Swiss pension funds manage assets of around 1.3 trillion Swiss francs, making them very successful compared to their European neighbors. Over the past ten years, pension assets in Switzerland have grown by an average of 6.7 percent per year, while in Germany, for example, they have increased by only 1.9 percent. One reason for the success of Swiss pension funds is their greater willingness to take risks when investing capital, especially in alternative asset classes such as private equity.
To a large extent, the investment advantages recognized by pension funds are also beneficial for private investors:
- Higher returns: Private equity can generate higher returns compared to traditional investments such as stocks or bonds. This is partly due to the active role that private equity fund managers play in increasing the value of their portfolio companies.
- Diversification: By investing in private equity, pension funds can diversify their investments more broadly and thus reduce risk.
- Inflation protection: Private equity investments can offer a degree of protection against inflation, as they generally invest in real assets and benefit from economic developments.
Private equity: How investors invest
For a long time, private equity was only accessible to institutional investors due to the high entry threshold of several million francs. However, there are now also opportunities for private investors in Switzerland to invest in this asset class.
- Fund of funds: Semi-professional investors can diversify into private equity by means of a fund of funds, which invests in several private equity funds. The minimum investment amounts are between CHF 200,000 and CHF 250,000.
- Closed-end private equity retail funds or mutual funds: The minimum investment amounts for these funds admitted to public trading are usually around 10,000 Swiss francs.
- Digital investment advisors: Everon, for example, enables private investors to start investing from 10,000 francs, depending on the financial product, as part of its private banking offering.
- Exchange Traded Funds (ETFs): ETFs offer retail investors a cost-effective and transparent way to invest in private equity without directly entering a closed-end fund. However, these ETFs tend to track an index of private equity exchange-traded companies such as KKR and Blackstone, and thus have a relatively high correlation to the broad stock market.
When selecting an appropriate private equity fund, there are many issues to consider that require a high level of expertise. Investment objectives and risk tolerance play a significant role. Funds pursue different investment strategies and together with the track record (reference list of investments) of the fund managers, this can be decisive for the success of the investments. There are also fee structures to consider.
All of this usually means the private investor is best served by a professional investment advisor to identify the appropriate fund and manage the investment.
Private equity for private investors: What to consider
Private investors considering private equity should keep two points in particular in mind:
- Appropriate proportion of the portfolio
- Illiquidity of the asset class
The optimal allocation of private equity in a portfolio depends on individual investment objectives, risk tolerance and investment horizon. Some experts recommend that private investors should invest a maximum of around five to ten percent of their total portfolio in private equity.
The asset class involves higher risks and requires a long investment horizon. A balanced portfolio should have appropriate diversification and consider private equity as a complement to other asset classes.
An important aspect that private investors should consider when investing in private equity is the lower liquidity compared to other asset classes such as equities or bonds. Private equity funds often have restrictions on the redemption of shares to ensure the long-term capital commitment required for this type of investment. Also, often even in the most liquid funds, shares can be sold, often only once per quarter.
In this context, redemptions are often referred to as “redemption” in the terms and conditions. The regulations in this regard are referred to as “gates”. Gates limit the proportion of the net asset value (NAV) that can be redeemed per quarter. In some cases, the maximum redemption amount may be limited to five percent of the NAV per quarter. Investors should be aware of these limitations and ensure they plan for the liquidity needs of their overall portfolio accordingly.
Reading Tip: Private Markets: New opportunities in the asset class for exclusive investments
Private equity: Under these conditions an investment makes sense
The private equity asset class requires specific conditions under which an investment in private equity makes sense for private clients.
Private individuals should therefore consider the following points before making an investment:
- Long-term investment horizon: private equity investments are designed for the long term and generally have a holding period of several years. Private clients looking to invest in private equity should therefore have a long-term investment horizon and be prepared to commit their capital for an extended period of time. The long-term nature of private equity investing allows companies to realize growth potential and create value, which can offer attractive long-term returns.
- Portfolio diversification: an investment in private equity should always be considered as a complement to a diversified portfolio. For private clients, this means having different asset classes such as equities, bonds or real estate before investing funds in private equity. Diversification can offset potential risks and reduce overall portfolio risk.
- Risk Tolerance: Private equity investments involve certain risks, including the risk of loss of principal. The performance of private equity funds can be volatile and is subject to various factors such as market fluctuations, economic conditions and the performance of the companies in the portfolio. Therefore, appropriate risk tolerance is among the most important requirements.
- Understanding of complex investment structures: Private equity investments are more complex than traditional investments such as stocks or bonds. Specific expertise is therefore required to understand and consider the various aspects of the asset class.
Access to qualified funds and expertise: private equity investing requires access to qualified funds and professional expertise. As a private client, it can be difficult to gain direct access to high-quality private equity funds. It is therefore often advisable to consult a financial advisor or professional asset manager who has expertise in this area.
