Risks
Special risks in private equity
Investment matters are a matter of trust.
Private equity investments involve considerable risks and can result in substantial losses. They are geared to the long term and are significantly less liquid than shares traded on the stock exchange. Thus, an often much greater profit potential compared to other forms of investment is always offset by increased or additional risks.
For this reason, the brokerage of such investments involves a great deal of responsibility. A truthful, objective portrayal of an investment’s risks and opportunities are essential for a fair, forward-looking client relationship.
This is why you should insist on the greatest possible transparency and engagement, both from us and from other providers.
So please – in your own interest – always observe the following principles:
- Never be tempted to make a hasty investment. Give yourself as much time as necessary in your decision-making process and, if necessary, get a third-party opinion from outsiders or industry specialists. If you’re put under pressure in terms of time, this is a warning sign.
- Allegedly secure private equity investments do not exist. The "worst case" is always the total loss of the capital invested. Promised profits and returns or a failure to explain the risks are further warning signals.
- Since 1 January 2020, capital brokerage in the private equity sector has been subject to the Financial Services Act (FINSA). This law serves to protect clients with regard to financial services. There was a transitional period until the end of 2021 for the most important new regulations. Make sure that you enquire about the applicability of the FIDLEG to the services offered. If your adviser doesn’t have adequate knowledge in the area, or if applicability is denied; this is a warning signal and it should be observed.
- Never base your investment decision on verbal promises. Always ask for written confirmation or an amendment to the share purchase agreement for information relevant to your decision (e.g. on risk/reward profile, investment horizon, or buy-back guarantees).
- The business case presented to you, i.e. the business model, should be the key basis for your investment decision. Check it in detail for credibility. Another warning signal is when only superficial information is presented to you.
- No one should enter into a business relationship with "unknowns". Thus, always get an in-person impression of your opposite number. A reputable provider will always be open to this request.
- You should also visit the target company in person and form your own impression of its management, who will ultimately be using your investment as "working capital". You should also make enquiries concerning the educational background and previous job history of the management team.
- Make sure that your adviser is registered in the so-called Swiss advisor register (e.g. that of BX Swiss) and have the register number provided to you. This registration is mandatory and requires proof of professional knowledge through appropriate education. If you receive insufficient information in this regard, this is also a warning signal.
Risks in private equity
Private equity is the venture capital financing of companies that are generally not listed on a stock exchange. Investments are usually made at an early stage of a company’s development, in which the chances of success are uncertain and the risks, which may extend over the entire development period, are correspondingly high.
The success of a private equity investment depends, among other things, on the right timing of the "exit" or sale. This exit can take place, for example, via an initial public offering [IPO], a sale to another company (trade sale) or a private equity fund (secondary sale), as well as via a management buyout.
Which solution is chosen depends largely on the market conditions prevailing at the relevant time. How easy or difficult the exit phase turns out to be – and whether the proceeds meet expectations – depends, among other things, on stock market trends.
Time lag risks
Private equity investments can usually only be sold years after the initial investment. You should be aware that you will have limited or no access to your capital for a long period of time. In principle, you have no right to exit early, and a potential exit may be delayed indefinitely.
Financing risks
Companies that are candidates for private equity investments may be highly leveraged and can therefore be more susceptible to negative interest rate trends than established companies. In addition, the risk of the company becoming insolvent and going bankrupt is also higher than for listed companies. It also isn’t unusual for the initial investment to be followed by further capital calls at short notice. If you don’t comply with such a capital call, you may lose all the capital you have invested up to that point.
