The global credit crunch could prove a long-term blessing for Switzerland’s investment environment. The currency of choice for many years, the Swiss franc lost favour between 2003 and mid-2007 after an uncharacteristic period of instability. But as liquidity dried up and currencies became more volatile, the franc has rapidly strengthened after its four-year decline. Since mid-2007 it has gained against the euro and the dollar among other currencies, and many economists see the franc regaining its former role as an international haven in times of volatility. The consensus forecast is for the franc to find a ‘fair value’ against the euro of around SFr1.40-1.45 and SFr1.10 against the dollar.
The recovery of the franc is considered likely to cement Switzerland’s growing popularity with foreign business and with wealthy investors attracted by its stable political and social climate, low corporation tax and high standard of living. Although the credit crisis has inevitably slowed activity in the financial sector, all the signs are that it will quickly rebound on the back of the economy’s gold-plated official rating of AAA Stable.
M&A business expected to rebound
The financial sector expects the M&A market, which was extremely active over 2006 and the early part of 2007, to recover as soon as the credit crisis settles and the price of debt reverts to more normal levels. Like all cross-border financial sectors, the industry has been affected by the drying-up of acquisition finance as banks hoard capital to strengthen balance sheets. Although the caution is mainly down to the crisis, the introduction of Basle II with its higher standards for regulatory capital has also affected the availability of credit.
At the same time domestic institutions have responded to the global tightening of standards by requiring more demanding loan covenants. As elsewhere, lenders seek lower-risk debt: equity ratios in a general reversion to more sustainable standards.
However there appears to be no shortage of appetite among acquirers when conditions improve in the capital markets. Several of Switzerland’s biggest companies in the pharmaceutical, food and tourism industries are reportedly waiting in the wings with substantial investment war chests. Cash-rich with robust profits and strong balance sheets, they have only temporarily frozen acquisition strategies as they wait for a more favourable investment climate to emerge.
Meantime analysts point out that the fundamentals of Switzerland’s corporate sector, which is dominated by SMEs, are extremely healthy with excellent forward order books, assured markets and stable cashflows.
Fiscal reform drives M&A markets
A host of reforms including laws on limited liability, mergers and corporate tax has continued to stimulate activity in the last two years. One of these is the clarification of tax law in what is known as the indirect partial liquidation regime involved in the sale of shares. Under the previous regime, the issue of the taxation of capital gains on the sale of shares in a business was typically argued case by case in the absence of clear rules. By making the regime more transparent, the clarification has made it easier for private investors and family-owned businesses to cash out their assets.
Real estate
In spite of the credit crisis, there is no shortage of funds for more normally leveraged investments in both residential real estate and smaller-scale commercial property transactions. There is a marked trend for wealthy investors to develop portfolios of prime properties through investment funds under recent changes to the law that have enabled more flexible participation in CBD, industrial and other property opportunities. There has been a healthy diversification of the M&A transactions market into retail, hotels and hospitals and other sectors in the last few years.
Although non-Swiss residents cannot in general own residential real estate, there are exceptions. For example, certain cantons apply a kind of quota for foreigners that has proved attractive to the new wave of wealthy private investors. Typically, these exceptions apply in the most desirable locations such as ski resorts like Verbiers and Gstaad. However there is no law preventing high net worth individuals from renting prime properties and the growing attraction of Switzerland has driven up rentals and helped fuel the residential market.
Meantime the large-scale, headline deals that typified early 2007 are temporarily off the agenda, mainly because banks face difficulty in syndicating loans. A repeat of the headline deals of the last two years are considered unlikely for 2008.
Swiss-style private equity continues to thrive
The domestic private-equity industry has generally defied the turmoil in financial markets. As before, it continues to concentrate on SME buy-outs in the Sf10m-Sf30m [£4.8m-£14.4m] range often overlooked by the biggest private-equity operators. Debt is readily available for these mid-market transactions, but at levels of leverage several notches lower than those available at the peak of the boom during 2004-mid-2007 as lenders return to more normal debt ratios. Mid-market private-equity firms continue to target family-owned SMEs with robust profits and largely unencumbered assets.
The family-run investment offices that are an integral part of private equity sector remain focused on the long term, as they have always done. They continue to seek long-term deals characterised by low volatility rather than ones featuring quick exits and high returns. The biggest deals, most of which were headed by foreign firms, are however off the agenda for the present.
Equities market matures
Despite the introduction of rules that have made the equities market more transparent, its relatively small size has long proved a deterrent to public listings by foreign companies. However observers hope that the influx of foreign-owned companies and wealthy individual investors to Switzerland will in time boost the equities market.
Integration with the EU
Switzerland’s participation with the EU continues to deepen through bilateral agreements that facilitate the financial sector’s growth outside its own borders. It continues to work towards a profitable integration with the single market that absorbs 62 per cent of all Swiss exports. These agreements include the rule on the free movement of persons, which among other things helps Swiss banks locate staff in EU-based branches.
It is also considered important that the sector does not miss out on the advantages of access to the EU’s single market in financial services. “We need innovative Swiss banks to enhance EU competitiveness,” as Brussels’ commissioner Charlie McCreevy told the association recently. For instance, although Switzerland is outside the Single Euro Payments Area [SIPA], Swiss banks have pledged to fully uphold all their obligations under it. Officially, the Swiss Bankers Association “wholeheartedly supports” these and similar arrangements that help bind the domestic and EU financial sectors. “Good relations between the EU and Switzerland matter a good deal to Swiss banks,” remains the official view.
For further information:
Tel: +41 44 498 98 98
Email: ldefferrard@wwp.ch
