Swiss pension funds, and other institutional investors, may rely on a fund of funds instrument to invest in small and medium sized companies in times of crisis, Rüdiger Fahlenbrach, professor at the Swiss Finance Institute of the Ecole Polytechnique Fédérale de Lausanne (EPFL), told IPE.
“In a fund of funds, a private company does the due diligence to find small and medium sized companies that need financing. It creates a large portfolio of preferred shares in the companies, and the pension fund or institutional investor then buys parts of the fund,” Fahlenbrach said, adding that the vehicle would lead to portfolio diversification.
Another instrument to attract investments in the local economy, linked to the idea of fund of funds, is a new type of security – cumulative preferred shares – that offers more flexibility to companies.
Fahlenbrach explained: “Preferred shares do not offer shareholders voting rights, there is no fixed maturity date to pay back a principal” and a company is allowed skip a dividend payment during difficult times, but such dividends are accumulated and paid at a later date.