A Swiss equity alchemist

Turnaround specialists seek out firms with weak balance sheets. Swiss Capital Group

Turnaround specialists seek to invest in companies with strong business fundamentals whose balance sheets are in poor health. Swiss Venture Update takes a look Switzerland's new millennium alchemists.

There are not a lot of distressed asset investment specialists in Europe. Alchemy Partners, with offices in the UK, Ireland, and Germany, is probably the best-known player in the “difficult deal” segment in Europe.

In the UK there are signs that their numbers are increasing. Aberdeen Murray Johnston Private Equity, for example, recently announced a first closing of a large, £100 million turnaround fund, according to Private Equity Online.

In Switzerland, two such investment management firms have emerged in the past months. Since the newest, Equatis AG, which recently closed a SFr30 million fund for turnarounds, has yet to complete a deal, Swiss Venture Update was able to only discuss the topic with Swiss Capital Equity Holdings AG (SCEH), which was founded in 1999.

Like Alchemy Partners, Swiss Capital Equity Holdings AG seeks to turn base metals into gold, or distressed equity into a valuable enterprise. SCEH is a part of the investment banking and asset management boutique, Swiss Capital Group AG.

SCEH has undertaken three turnarounds since it founding at the end of 1999. It turned around Heatec Bertrams, a maker of jumbo-sized heaters for world-class thermal fluid systems. It helped a construction materials company now known as Egolf AG to develop its market and come bank from the brink of extinction.

And it is working with the former phone-making division of Ascom, which is emerging as a niche vendor of innovative ISDN terminals under the new name, Swissvoice.

These were non-listed companies, but the firm also looks at listed companies if they meet the criteria.

Difficult deals require special teams

Georges Burki heads up the group at SCEH. He was a professional classical musician before turning his talents to the law and business. Now he spends his time fine-tuning the finances and operations of struggling mid-sized firms.

It usually takes Burki’s team anywhere from 2 to 6 months to complete due diligence. “We put a lot of emphasis on the deal, making sure that the transaction supplies the company with adequate liquidity and equity,” explains Burki.

SCEH won’t touch a sick company and try to fix it, choosing rather to lead the company into a “controlled receivership” and start with a “clean balance sheet.”

It is quite a different ball game compared to venture capital investing or to buyout financing and it takes a special kind of management team to restore value to distressed corporate equity.

The CVs of the other three members of the SCEH team, like Burki’s, are atypical for private equity investors and illustrative of the kind of diverse experience and educational background required.

Beat Näf combines an ETH engineering degree with experience as a manager and a consultant. Most recently he worked at the now defunct European Webgroup to turn around a German portfolio company. He worked for McKinsey manager and prior to that at two of Switzerland’s more successful, privately owned high tech firms Crypto AG and Schmidt Telecom.

Then there is Robert Neville, an ETH engineer with a general management background and a flair for sales and marketing whose former workplaces include a South African plastics-maker and a Swiss Nano technology firm.

The fourth member of the team is Felix Ruble with an MBA, and experience consulting for McKinsey and Holder bank.

What SCEH looks for in an investment?

SCEH typically looks for companies with a track record, renowned products, an established client base or brand name. The skilled workers for key operational functions have to be in place and not have left when the company started to flounder.

There has to be stakeholders (key creditors, owners, key employees, labor unions) willing to contribute by financial or other means to a successful turnaround.

SCEH also look for clear turnaround levers with a special focus on selective divestitures, cost and efficiency improvements rather than growing business volume in a first phase and exit options within 3-7 years mainly via trade sale

Swiss Capital Equity Holdings AG may also invest in companies undergoing, or considered likely to undergo reorganization under bankruptcy, receivership or insolvency law.

“But we prefer to get involved before the company files for receivership, so we can structure an offer to buy the company out of receivership or prevent the company from going into receivership in the first place,” explains Burki.

There will be no shortage of deal flow if Zech’s interpretation of the statistics, typically available from Credit reform and Prongs, are correct.

There are between 10,000 and 15,000 medium-size companies in Germany and Switzerland that earn between 20 and 250 million francs per year.

Between 10 and 15 percent of these companies are turnaround candidates, estimates SCEH.

The company will also be able to benefit from a trend that sees non-core businesses or divisions being cleaved out of larger, diversified corporations.

The trend now in corporate Switzerland is to build shareholder value by concentrating on core markets and spinning off the rest – as opposed to the diversification trend of previous years.

The recent increase in spin-off or divesture activities by the likes of Ascom and Leica Geosystems is typical of this trend.

by Valerie Thompson