The private equity market in Switzerland is on a slow trend forward, and, similarly to its surrounding EU member countries, Switzerland has seen an increase in the volume of investments in private equity and venture capital structures in the last five years, accompanied by an increase in the absolute number of asset managers (of all categories).
The Swiss private equity community is still largely employing foreign structures, mostly based in other countries in Europe, such as limited partnerships under UK law or Société d’investissement à capital fixe (Sicaf) or Société d’investissement à capital variable (Sicav) under Luxembourg or Irish law. According to fundraising data by Preqin Private Equity Online, in 2015, total private equity fundraising in Europe was €63bn (up 14 percent from 2014).
Private equity funds in Switzerland
Swiss law does not provide for a specific private equity legal framework but addresses a variety of structural frameworks in a number of different laws. Predominantly, the Federal Act on Collective Investment Schemes (CISA, the most recently revised version of which came into force on 1 March 2013 with a transitional period ending on 1 March 2015) and accompanying ordinances, among which the most important is the Ordinance on Collective Investment Schemes (CISO), include rules applicable to closed-end fund structures and in general offer key provisions for the set-up sought after by private equity players.
Under Swiss law, it is possible to set up a Swiss private equity fund in the form of a Swiss limited partnership according to CISA/CISO, along the lines of an English limited partnership, or a Swiss investment company with fixed or variable capital (Sicaf or Sicav) in the form of a Swiss company limited by shares governed by the Swiss Civil Code.
In addition to the availability of possible limited liability structures, Switzerland remains an attractive location for investors due to its tax regime in line with European standards (e.g., tax-transparent fund structures and certain exemptions from stamp duty requirements and VAT) and not least due to its ‘Swissness’, which above all stands for reliability, correctness and trust, both of the economic and political environments.
At first sight it is thus surprising why, as of today, only 18 private equity funds in the form of a Swiss Sicav are registered with the Swiss Financial Market Supervisory Authority (Finma) (out of a total of 1542 funds), as opposed to more than 5000 private equity vehicles elsewhere in Europe.
The reasons for this situation are numerous. Firstly, until the recent introduction of the Swiss limited partnership, Swiss law lacked an adequate vehicle that could be used to organise closed-end funds. Secondly, the Finma-dictated regulatory landscape provides for a slow and expensive application process (e.g., Finma requires the application to be reviewed by a (usually expensive) certified auditor even before submitting it) and maintenance costs during the lifetime of a fund are relatively high. In comparison, Luxembourg or Irish Specialised Investment Funds (SIFs) in the form of Sicavs or Luxembourg or UK special limited partnerships, may be set up in less time and for a lower cost, and their regulatory burden throughout their lifetime is lower than for their Swiss equivalent structures. In addition, Swiss market players struggle to keep track of the frequent modifications of and additions to the regulatory requirements, which apply also to fund structures accessible only for qualified investors (which are justly less regulated in the EU). Lastly, high living costs and an expensive personnel environment are a further detriment and do not help to attract private equity players.
Finma is aware of these apparent disadvantages of local market players and has already taken measures to improve the application process by introducing a newly created asset management division, which henceforth should accelerate the application process. Discussions regarding a possible easement on the regulatory requirement for investments by qualified investors are ongoing and will hopefully bear some fruits in the near future.
Private equity management or advisory in Switzerland
As opposed to actual private equity funds, managers and advisers to private equity and venture capital structures located in Switzerland are numerous and steadily growing in number and assets under management. Most of these companies are small to mid-sized and Finma regulated. Although Swiss law foresees that “in general all fund administration companies and managers of collective investment schemes are subject to a license by Finma”, certain de minimis exceptions apply for the time being, for instance in cases where a certain threshold of assets under management is not reached and only qualified investors invest into the collective investment schemes. CISA also provides for the possibility, afforded to licence-exempt asset managers, to opt in and apply for a Swiss licence, especially if foreign applicable law requires the asset manager to be supervised and regulated locally. As of today, there are 183 asset managers of open-end and closed-end collective investment schemes registered with Finma, which is more than twice the number of managers registered in 2009.
The European market is essential to the private equity landscape in Switzerland. The Swiss regulator Finma, the Swiss Funds and Asset Management Association (SFAMA) and the Swiss Private Equity and Corporate Finance Association (SECA) therefore closely follow all fund related regulatory developments in the EU and reflect amendments to EU law in local legislation. The EU Directive on Alternative Investment Fund Managers (AIFM Directive), introduced in 2011, was thus swiftly translated into a largely equivalent Swiss revision of CISA/CISO. Among other things, the AIFM Directive subjects all EU investment fund managers to a licence and supervisory requirement and also regulates access to the EU market from non-EU countries, such as Switzerland. AIFMs based in Switzerland qualify as non-EU managers and may benefit from the AIFMD third-country regime, likely to be finalised in the course of 2016. Consequently, one of the main changes of the revised CISA/CISO was the requirement for managers of foreign collective investment schemes to obtain a Swiss licence issued by Finma.
The Swiss market supervisory bodies, together with organisations such as SFAMA and SECA, are working to promote Switzerland as an attractive fund location through a variety of measures and projects. Market players’ hopes are high that Switzerland will soon be able to position itself as a valuable competitor for fund structuring in the international landscape of private equity havens such as Ireland, Luxembourg and the UK, and offshore destinations such as Jersey, Guernsey and the Cayman Islands.
Private equity fundraising/distribution in Switzerland
The revision of CISA/CISO also brought about some important changes regarding the distribution of foreign or local alternative investment funds (AIFs), including private equity funds. Under the new CISA/CISO, the term ‘distribution’ has been defined in a much broader way, to encompass any form of offering or advertising of any kind and with any material pertaining to investment funds, as long as such distribution is not exclusively directed at regulated financial intermediaries (such as banks, insurance companies, securities dealers, etc.).
In general, Swiss law distinguishes three kinds of distributions of AIFs: (i) distribution to regulated qualified investors (supervised financial intermediaries such as banks, regulated insurance companies, fund management companies and securities dealers); (ii) distribution to unregulated qualified investors; and (iii) distribution to retail investors.
The distribution of any AIF in Switzerland to investors of categories (ii) and (iii) requires a distribution licence, as well as the prior appointment of a Swiss representative and a paying agent (the role of Swiss representative is often played by asset management companies, while that of paying agent is typically taken on by local banks). No licence is required instead for distribution to investors falling in category (i).
Swiss law allows two additional exceptions to the licensing requirement: (i) the distribution of foreign AIFs to regulated and unregulated qualified investors with residence outside Switzerland (Swiss or non-Swiss nationals), which is not covered by CISA/CISO; and (ii) cases of reverse solicitation, where an investment is made on the exclusive initiative of the investor, which is not considered ‘distribution’ according the CISA/CISO.
Fundraising activities in Switzerland have increased over recent years – a rather positive signal and a sure indication that the European fund community is still very much interested in Switzerland as a private equity market. According to SECA’s statistics, over the past five years approximately CHF 1.5bn has been raised from Swiss investors for foreign and domestic private equity structures. As opposed to investments in listed companies, investments in private equity or venture capital structures have become more attractive, as investors generally profit from higher yields, less volatility and access to unlisted companies (often not covered by research analysts and asset managers). Especially in light of the presently stagnating stock markets worldwide, this trend is likely to continue.
Nicole Baer Leone is an attorney at CP-DL Leone & Partners SA. She can be contacted on +41 (0) 43 508 4980 or by email: email@example.com.
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