Switzerland: Swiss private equity market after the global financial crisis

Oliver Triebold
Schellenberg Wittmer
Zurich

Overview

Switzerland is an attractive market for private equity investments, in particular because of its highly developed banking system and capital market, its reliable and stable legal environment and its advantageous and dependable tax treatment. Further, Switzerland's top innovative performance is attributable to the excellent collaboration of its highly reputable Swiss Federal Institutes of Technology and universities with industry, which produces many high-tech spin-offs. The availability of excellent talent, highly active academic institutions and rapidly-reacting industry associations guarantee further progress in economically challenging times.

Fundraising

In 2009, the Swiss private equity market followed in terms of fundraising the broader trend of the overall European market, with a significant decrease in 2009 due to the global financial crisis. According to the European Venture Capital Association EVCA, Swiss private equity firms managed to raise € 807m in 2009 in an extremely difficult fundraising environment – down 72 percent compared to 2008 levels (€ 3.3bn). However, 2008 was a record year for fundraising, largely due to the raising of a € 1bn fund. Also, the four preceding years of strong fundraising left Swiss private equity firms with plenty of capital to invest.

Investment Activity

Investment activity in the Swiss private equity market held up better than the overall European market. After a growth of 44 percent between 2007 and 2008, the amount invested by private equity firms based in Switzerland fell by 42 percent in 2009. Therefore, 2009's total investment (€ 710m) remained close to the investment levels observed in 2007 (and 2006). In 2009, also Swiss venture investment proved resistant to the crisis and went up nearly a third to € 215m; this was mainly driven by a surge in start-up investments, which increased by more than 60 percent to € 133m. The number of start-up companies financed grew by more than 20 percent. By contrast, buyout investment value decreased by more than 50 percent to € 259m. Growth capital investment fell to only € 75m.

In terms of amount invested and number of companies financed, life sciences was the most popular sector for both local and foreign firms. More than half of the capital invested in 2009 went to the life sciences sector. Switzerland was able to maintain its position as a major biotech hub in Europe and the significant interest from international investors confirms the attractiveness of Switzerland as a location to start and grow medical and biotechnology businesses.

Legal and Tax Developments

Whereas the legal environment remained relatively stable over the last few years, in the area of corporate taxes numerous favourable changes for investments and entrepreneurial activity came into effect. The main ben-efits are:

Extension of participation relief on dividend income (effective from January 1 2011): In order to obtain participation relief on divi-dend income after the effective date of January 1 2011, now a participation of at least 10 percent of capital or a market value of at least CHF 1 million is sufficient (now: 20 percent and CHF 2 million).

Extension of participation relief on capital gains on the sale of investments (effective from January 1 2011): After the effective date of January 1 2011, limited companies and cooperatives may obtain the participation relief on capital gains upon sale of an interest of at least 10 percent (now 20 percent). The one-year minimum holding period remains unchanged.

Introduction of the capital contribution principle (effective from January 1 2011): This change allows repayment of shareholders' capital contributions without 35 percent liability for Swiss withholding tax. Generally, this applies for additionally paid-in capital, contributions into the reserves of a company without increasing the nominal share capital and share premiums accumulated after December 31 1996. Repayment of nominal share capital remains withholding tax free. There are certain requirements, in particular that the correct recordings of such shareholder capital contributions in the books of the company are made.

Imputation of income tax against capital tax: The Swiss cantons may impute corporate income tax against capital tax as from January 1 2009.

Extension of rollover relief (effective from January 1 2011): After the effective date of January 1 2011, the tax exempt rollover relief of undisclosed reserves in the case of an asset replacement is alleviated.

On January 1 2010, a new Swiss value-added tax (VAT) law entered into force. The new VAT law features a noticeable simplification of the system, enhances transparency, is more customer-friendly and aims at providing more legal certainty. Further, as from January 1 2011, the VAT rates will be increased by 0.4 percent to an 8 percent standard rate (the privileged rate will be increased by 0.1 percent to 2.5 percent).

The ink on these recent changes has not fully dried yet and the legislator is already embarking on a further tax reform with the aim to:

• Strengthen Switzerland as domicile for businesses;
• Increase the growth potential;
• Solve the tax dispute with the EU.

To reach that goal, it is contemplated to do away with the stamp duty on the issuance of on equity and bond securities, a system change with respect to the participation exemption, loss off-setting unlimited in time as well as loss assumption among companies of the same group, changes in the cantonal tax regimes for holding and domiciliary companies as well as the abolishment of the capital tax. However, it is expected that to realise those changes will take some time, possibly years.

AIFM Directive

In the alternative investment industry, the final wording and the implications of the Directive on Alternative Investment Fund Managers (AIFM) are still unclear. There are now two very different versions of the Directive and at this point it is not possible to estimate the outcome of the three-way negotiations between the Council of the European Union, the European Commission and the European Parliament. Given that the Directive covers all non-UCITS, and their managers, that are distributed in the EU to professional investors, it is likely to have substantial implications for third coun-tries such as Switzerland. This is certainly a devel-opment that needs to be monitored in the future.

Conclusion

Switzerland is an attractive market for private equity investments. Numerous favourable changes for investments and entrepreneurial activity came recently into effect to further improve the regulatory framework. Particularly due to its more conservative leveraging, the PE industry and portfolio companies in Switzerland have weathered the financial crisis rather well. The industry is ready and able to seize opportunities that present themselves in the future.