swiss market

Dr. Christian Waldvogel, Associate Director

Renaissance Foundation.

Dr Jacques André Schneider

Independent expert and advisor.

Originally, it all started with the 13.4184 Graber movement “Pension funds. Long-term investments in technologies of the future and creation of a fund for this purpose”, filed on December 12, 2013 by Konrad Graber, then councilor for the states of the canton of Lucerne. This motion essentially consisted of two parts: first, the launch of a Swiss Fund for the Future financed by pension funds, and then regulatory changes to make it easier for Swiss pension funds to invest in innovative Swiss SMEs, including start-ups. The first part was not successful because pension funds are not rightly in favor of imposing that a percentage of their wealth must be devoted to a specific subsidy. The second part of the Graber motion gave rise to a new allocation of Swiss private capital in the ordinance on occupational old-age, survivors and disability pensions (oPP2), decided by the Federal Council on November 17, 2021. This second part is certainly an incentive, but not binding on pension funds.

Focus on new private equity allocation in Switzerland

As the Federal Office of Social Security (OFAS) points out, the approach adopted for Swiss private equity is similar to that adopted by the Federal Council on August 26, 2020 for the category of infrastructure investments: “The basic principle of this modification is to extract these investments from the catalog of alternative investments”. Thus, Swiss private equity has become an investment category in its own right and very distinct, thus avoiding a “satellite” within the allocation of private equity to alternative investments. Effective January 1, 2022, this new category of investments allows pension funds to invest up to 5% of their assets in two types of investments, namely equity investments (private equity) and receivables (private debt) in unlisted Swiss companies. This category authorizes direct investments in unlisted companies or through collective investments (funds or funds of funds).

What opportunities for this new allocation?

In terms of capitalization, the Swiss stock exchange is one of the 15 largest financial centers in the world, but it is by far the most concentrated. Only the Nestlé, Novartis and Roche groups represent 50% of the Swiss Market Index (SMI). This new Swiss private equity allocation offers pension funds the possibility to diversify their exposure to Swiss companies by integrating unlisted companies. Swiss SMEs represent 50% of the gross national product (GNP) and the vast majority are not listed on the stock exchange. With more than 10,000 Swiss SMEs with between 50 and 250 employees, the investment universe for this new category is more than sufficient.

A growing asset class

The share of Swiss GDP represented by unlisted companies is constantly increasing. This phenomenon is already accentuated in the United States, with a 50% reduction in the number of companies listed in the last twenty-five years, mainly due to the consolidation of industrial sectors and the reduction in the number of IPOs. This decrease in IPOs is mainly explained by the strong increase in private equity capital replacing public market capital. Some companies also forgo a listing, or even decide to withdraw it, in order to avoid the regulatory rigors and costs specific to listed markets.

Unlisted Swiss companies represent attractive investment opportunities. In the past, Swiss SMEs have indeed demonstrated their financial performance, an organic growth rate many times higher than large companies listed on the SMI and excellent resilience during economic downturns, including during the current health crisis. The outstanding historical performance of the SPI extra is indicative of the potential of Swiss unlisted SMEs, as many companies that make up the SPI extra index have the same characteristics as unlisted Swiss SMEs. These are family-owned companies or at least those of family origin, with a strong base in Switzerland and internationally oriented operations in well-defined, high-value-added market niches. Thus, Swiss private equity should be seen as an opportunity to diversify Swiss equities within the framework of a high-performance, full and well-structured investment allocation, taking into account their specificities in terms of risk and liquidity.

It would be wrong to limit the creation of this new category to a simple political response to the Graber motion. On the contrary, we can only rejoice that such a policy initiative has given rise to such a concrete measure at the oPP2 level, facilitating new investment opportunities in unlisted Swiss SMEs for pension funds and their members, while strengthening the contribution of pension funds for Swiss economic success. This is a key element for the sustainability of Swiss occupational pensions, especially as SMEs account for two-thirds of jobs in Switzerland and are therefore a key contributor to the AVS and the 2nd pillar.

Dr Jacques André Schneider
Dr. Christian Waldvogel

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