View from the top

It may have a small direct private equity market, but Switzerland is a world leading centre for private equity fund of funds managers. It is home to six of the 50 largest funds of funds – in terms of assets under management – between them investing nearly $50 billion into the asset class. The country is second only to the US and Britain in terms of the number of heavyweight institutional LPs which call it home.

It matters, therefore, what the Swiss “brain trust” of influential private equity investors thinks of the industry and its future prospects. And the view from the top, it seems, is positive.

Investors have often approached the asset class with an 'alternative investment mind-set', but returns of 10 to 15 percent on a long-term basis are not actually that bad Steffen Meister

What will returns for this difficult period of financial crisis look like? They will certainly be dented, but not decimated. The build up of the debt bubble juiced returns on the way up but those investments made around the peak of the bubble – in the lead up to mid-2007 – will be hit significantly, says Rainer Ender, managing director of Adveq, a Zurich-headquartered firm with $4 billion under management. But, he adds, some recent IPOs, such as Amadeus, NXP and Kabel Deutschland, show that good deals done during the height of the market “will return their money”. “Then you have the ‘post-crisis’ investments during ‘09 and ’10 – we are very bullish about them,” he adds.

“Expectations are being revised as we move along,” says Petr Rojicek, partner and chief investment officer of Zurich-based fund of funds group Alpha Associates. “If you had asked the same question in the first half of 2009, you would have received a different answer: the market looked like a complete disaster.”

“From a client point of view, deals done in the ’06 and ’07 period may yield low returns, perhaps in the low double-digits, but the question is, will they outperform public markets, and I think they will,” says Steffen Meister, chief executive officer of Partners Group, an alternative assets giant with €20 billion under management across various asset classes.

“Investors have often approached the asset class with an ‘alternative investment mind-set’,” says Meister, “But returns of 10 to 15 percent on a long-term basis are actually not bad.”

So far, private equity has been dominated by equity investments in privately held companies. Now it is expanding its scope…there are several players who are already…expanding into multiple lines. If private market investment continues, these firms will be well-positioned Rainer Ender

Different market segments will have different stories to tell, says Meisters. He references direct investments into mid-market businesses during the last couple of years. “They have been done at multiples of six to seven times EBITDA, and these are extremely interesting entry valuations even in a low growth environment,” he adds.

At the large-cap end of the spectrum, returns are being squeezed by the backlog of capital waiting to be deployed in this bracket. With entry multiples ranging from 10 to 13 times EBITDA, returns will not be as attractive as most have come to expect, says Meisters. “But in two to three years time I don’t see why things should not be back to normal.”

When asked to consider which type of GPs will be top of the tree in five years time, the investors point to two different camps. On the one hand there will be the local, sought-after highly targeted GPs with strong track records of sticking to their core business. “The likes of Hony Capital in China or ECI Partners in the UK, for example,” says Meister. “There will always be a place for this type of fund and the international groups will not be able to beat them on returns.”

At the other end of the spectrum will be the expansive global firms with asset management capabilities across a broad range of asset classes. “So far private equity has been dominated by equity investments in privately held companies. Now it is expanding its scope in to areas like project finance, real assets, infrastructure, real estate, private debt,” says Ender. “There are several players who are already doing this at fund level, expanding into multiple lines. If private market investment continues, these firms will be well-positioned.”

Meister says there are perhaps 10 groups, emerging either from LBO backgrounds or wider private markets backgrounds, who are seeking to establish a local presence, but on a global scale. “These are becoming similar, in terms of the way they are set up to service clients, to global investment banks: with local front offices around the world and large global sector teams,” he says.

The problem, says Meister, will be for those firms caught in the middle of these two models.