Shareholder letter
Dear Shareholders,
After all the turbulence and challenges that marked the 2022 investment year, global financial markets generally displayed more constructive and positive developments during the first six months of 2023 than most experts had predicted. Leading equity indexes closed the first half in the green, although in some cases the gains were mostly attributed to a mere handful of mega-cap stocks. That performance must be viewed against a still challenging environment distinguished by monetary policy tightening, rising bond yields, high rates of inflation in some regions and persistent geopolitical uncertainty.
There were still no signs of a recovery in small- and mid-cap growth stocks within the healthcare sector – an investment area targeted by Bellevue. These stocks were unable to keep pace with the broader market advance and some even showed a negative return. Demand for healthcare investment solutions remained subdued given the sector’s sub-par performance.
The specific circumstances of the primary investment universe targeted by Bellevue as a specialist asset manager distracted from the progress made towards expanding its position and profile in the private markets business.
Market-induced decline in assets under management – net new inflows into successful strategies
The sub-par performance of Bellevue’s target market segments and the resulting very weak performance of its healthcare strategies led to a decline in assets under management. Besides reducing assets under management by CHF 800 mn, the adverse conditions in the healthcare space led to a high level of redemption activity. Investors also took advantage of attractive entry points, especially in the Bellevue Digital Health and Bellevue Medtech & Services (Lux) funds, which absorbed inflows of more than CHF 330 mn thanks to their strong performance. Overall net outflow amounted to CHF 468 mn, which represented less than 5% of total assets under management, resulting in an overall decline of approximately 14% in assets under management to CHF 8.1 bn. Clients continue to appreciate our healthcare investment expertise despite the segment's persistent weak performance. Our broad international client base remains stable.
Earnings curbed by weak markets – selective expansion of investment expertise
The lower level of assets under management also had an impact on Group earnings for the period under review. Average assets under management were down by 18% compared to the first half of 2022, a period buoyed by the peak in assets under management reported at year-end 2021. Income from asset management services therefore declined by 20% to CHF 43.3 mn. Market-induced unrealized losses on investments in proprietary products and on financial assets amounted to CHF 2.5 mn, well below the corresponding prior-year figure of CHF 8.7 mn. Total operating income for the period amounted to CHF 41.3 mn, a decline of about 12%.
We continued to build our profile as a specialist asset manager by selectively strengthening our investment expertise. Besides recruiting additional investment specialists for its healthcare strategies, data scientists for AI/big data were hired along with medical experts for neurological diseases. The Private Markets business area was expanded with the recruitment of a private equity secondaries team, and additional analysts as well as experienced direct equity management experts were recruited for the direct investment operations. More resources were also allocated to our sales teams in our core markets of Switzerland and Germany. These efforts to strengthen the very foundation of our business model – a highly qualified and motivated workforce – explain the approximately 5% increase in personnel expenses for the period. Other operating expenses rose by a similar amount in the wake of ongoing expenditure on infrastructure (core application upgrades among other items) and the deployment of next-generation technology (digitalization, introduction of AI solutions). As a result, total operating expenses increased by almost 5%. The cost/income ratio rose to 70.1% and is thus temporarily above our long-term target range of 60–65%. Group net profit amounted to CHF 8 mn, a decline of 44% from the prior-year period. Return on equity for the period stood at 14.8%.
The reported results for the first half of 2023 fell short of our ambitions, but we are confident that Bellevue is well positioned and that its business model as a specialist asset manager will deliver better results again as soon as the interest rate situation stabilizes, thus helping a recovery in healthcare stocks to take hold. The aforementioned investments will be supportive in this regard.
Considerable rebound potential for healthcare and niche strategies
Bellevue’s product range comprises investment strategies in the areas of healthcare, selected niches, and private markets. Bellevue’s healthcare strategies are predominantly invested in small and mid-cap growth stocks with strong innovation profiles, and it has established a broad range of products covering various special themes in this segment. Its flagship product, attesting to its acknowledged investment expertise within the healthcare sector, is BB Biotech AG, an investment company that has generated excess returns for investors for 30 years. The biotech sector has clearly lagged the total market during the past two years, so BB Biotech now has considerable rebound potential given the intact business fundamentals and attractive valuations of its portfolio companies. Another important pillar of our healthcare investment expertise is Bellevue Healthcare Trust, an investment trust with a well-diversified portfolio that delivered a solid return during the first half despite the healthcare sector’s overall weak performance. Other key strategies in Bellevue’s diverse product range are the Bellevue Medtech & Services Fund and the Bellevue Digital Health Fund, both of which likewise delivered positive returns for the first half (+8.8% and +11.7%).
Our niche strategies serve to identify and utilize structural growth trends and capture related investment opportunities at an early stage.
Our niche strategies serve to identify and utilize structural growth trends and capture related investment opportunities at an early stage. The carefully chosen portfolios of the Entrepreneur funds came under increasing pressure after the outbreak of the COVID-19 pandemic. These funds showed a clearly positive correction during the first half fueled by mostly robust earnings announcements. Other elements of the Group's product range must still demonstrate their long-term viability in today's competitive landscape and will be subject to an ongoing evaluation.
Expanded range of private markets solutions – proof of concept achieved
Our positioning as a specialist asset manager was further strengthened with the expansion of our Private Markets unit, the most recent addition to Bellevue’s investment spectrum. Thanks to this expansion, clients can now take advantage of early access to the non-public investment universe of successful, and mostly owner-managed, companies. The structural growth market of direct equity investments is increasingly opening up to experienced private clients, a trend that is giving market growth an additional boost. The offering of Bellevue Private Markets now comprises the three niches of direct equity investing, co-investment funds, and scalable special strategies, specifically strategies for private equity secondary transactions. In the direct investing niche, we have built a deal-by-deal investor group that now numbers about 30 members in total (entrepreneurs, families and selected institutions). It is helping to support the sustained growth of 15 small- and mid-sized enterprises in the DACH region with a total investment volume of more than CHF 240 mn. We demonstrated proof of concept with the first exit that was realized during the first half of 2023, and more exits are on the horizon. Bellevue effectively covers the entire spectrum of services and solutions in private markets, from direct engagement with potential investors and the identification of attractive investment targets to the competent management of direct equity investments and the arrangement of successful exits.
The successive expansion of the Private Markets unit is intended to grow and further diversify the Group's recurring income streams.
In May 2021 Bellevue launched Bellevue Entrepreneur Private I, a co-investment fund that offers a broader base of clients access to the above-mentioned deals arranged with the exclusive investor group as well as other exclusive direct investments. The fund has already invested more than 50% of committed capital and it has delivered a very good performance during its first two years of operation. In view of this positive development, Bellevue plans to launch a second co-investment fund in 2025.
Bellevue’s offering of private markets solutions is rounded out with scalable special strategies. Bellevue Global Private Equity 2023, a niche strategy for private equity secondary transactions, was recently launched with a target volume of USD 150–200 mn and a first closing is planned for the third quarter so the fund's investment activity can commence. The current market environment for buying up high-quality private market assets at low valuations offers enticing investment opportunities.
The successive expansion of the Private Markets unit is intended to grow and further diversify the Group's recurring income streams while creating a very attractive, supplementary source of performance-based income for Bellevue.
Business model offers promising growth prospects
The dynamic growth of Bellevue’s business prior to 2021 has, since the first half of 2021, been impeded by market developments. These prolonged market headwinds, characterized by stubborn inflation, rising interest rates and unresolved geopolitical tension, continued to blow during the first half of 2023. Although there have been some initial signs of relief on the inflation and interest-rate fronts in the near future, many investors are likely to stick to the sidelines and not add new positions to their portfolios because of the prevailing general conditions. Against this backdrop, any expectations of a significant recovery in the earnings base and earnings power of Bellevue Group during the second quarter of the current year must be dampened. In view of the currently lower baseline, we assume that a significant improvement is not realistic until the coming year.
Our business model’s strategic growth prospects remain intact. Thanks to our distinctive positioning and tangible growth drivers, we are in a position to generate sustained added value over the long term. Healthcare remains a mega trend and a structural growth market that has delivered a wide range of innovation and corresponding investment opportunities. We are well positioned in biotechnology and other subsectors of the healthcare industry to profit from a more favorable market environment and realize a sudden upturn in assets under management. Our margin structure is solid. The high scalability of our business model will contribute to the dynamic growth of our earnings power. We are also pleased with the positive developments at our Private Markets unit, especially with respect to our growing and mature portfolio of direct investments. We expect an increasing number of exits and attractive performance-based income (so-called carry income) that will support our overall earnings.
Underpinned by an entrepreneurial, lean organization with a well-balanced risk culture and our above-average financial strength, our business model remains attractive and will create value added for all stakeholders.
A business model can only be successful thanks to the loyalty and trust of the company’s clients and shareholders and the acknowledged competence and extraordinary support of all employees. On behalf of the Board of Directors and the Group Executive Board, we thank our employees for their untiring work. We also thank our clients and shareholders. Meeting their needs, expectations and wants is what inspires us every day.
Veit de Maddalena
Chairman of the Board of Directors
André Rüegg
Chief Executive Officer