Most investors limit themselves to buying shares or bonds when investing in companies. This makes sense because other forms of investment, such as venture capital and peer-to-peer lending have high levels of risk attached to them. Participation certificates (German: Partizipationsschein, French: Bon de participation) offer a viable alternative to stocks and bonds.
What is a participation certificate?
A participation certificate is a certificate which entitles its holder to dividends based on the performance of its issuing company. This sets it apart from a corporate bond, which pays out interest on the amount invested at predetermined rates. Unlike a share, a participation certificate is not a title deed and does not represent ownership in a company.
Participation certificates can be purchased by any investor, just like shares. Like shares, they may be offered to the general public at the issuing company’s discretion. This makes them accessible to most investors. Like shares, they can also be purchased by non-resident investors. Unlike shares, they do not represent corporate ownership and they do not include voting rights. Participation certificate owners must be registered with issuing companies. Swiss companies may hold annual general meetings for their participation certificate owners, but these meetings do not include votes.
Participation certificates provide the exact same rights to dividends that shares do. They also provide the same rights to the issuing company’s assets in the event of bankruptcy. The issuing company’s corporate statutes must designate a specific percentage of the company’s assets as participation capital, and this capital must be divided between a specified number of participation certificates. Participation certificates must have a nominal value. The nominal value is equal to the portion of the participation capital which each certificate represents. For example, if a company’s participation capital were 1 million Swiss francs and it was divided into 100,000 participation certificates, the nominal value of each certificate would be 10 francs.
Participation certificate holders cannot be disadvantaged in relation to shareholders with regards to dividends or entitlements in the event of bankruptcy. If a company issues more than one type of share, its participation certificates must provide at least the same dividend and bankruptcy entitlements as its most basic share class. Any changes to corporate statutes which affect participation certificate holders must be agreed to by participation certificate holders by means of a vote in an extraordinary general meeting (EGM).
In some cases, a company’s participation certificates may cost just a fraction of what its shares cost. This is the case, for example, with Lindt & Sprüngli, which issues both shares (ISIN: CH0010570759) and participation certificates (ISIN: CH0010570767). This makes them a more cost-effective means of accessing dividends. Some Swiss companies which do not offer their shares to the general public issue participation certificates as a means of raising capital. In this case, participation certificates can make it possible for investors to participate in the success of companies which they would not otherwise be able to invest in.
In the past, participation certificates were often issued as bearer securities. Today, most companies only issue registered participation certificates and maintain registers of participation certificate holders. Ownership of participation certificates can be transferred, which means that participation certificates can be sold on a secondary market. The participation certificates of some larger Swiss companies can be traded on the SIX Swiss Exchange and those of some mid-sized Swiss companies are traded on the Berne Exchange (BX) or the OTC-X exchange. If demand exceeds supply, the market value of participation certificates can increase just like that of shares. If buyers expect the dividends attached to a participation certificate to increase in the future, they may be willing to buy them at prices above their nominal value. Participation certificates are sometimes (incorrectly) titled shares by brokers and sold as such. However, the official titles of these securities normally include the PS (Partizipationsschein) or GS (Genussschein) acronyms.
In addition to cash dividends, participation certificates may also include entitlements to dividends in kind, such as limited complimentary access to the goods or services provided by the issuing company.
Disadvantages of participation certificates
Unlike shares, participation certificates do not entitle their holders to vote on company decisions. This means that investors must have a great deal of faith in the company and in the ability of its shareholders to make profitable decisions. Another disadvantage is that – except in the case of the most sought-after companies – the secondary market for participation certificates is less liquid than the secondary market for shares. This results in large spreads between bid and ask prices. Unlike regular Swiss participation certificates which can be issued by any category of company, Swiss participation certificates can only be issued by corporations. This limits the kinds of companies which you can invest in using this investment vehicle.
How to invest in participation certificates
Some Swiss participation certificates can be purchased directly from issuing companies at their nominal value, which means you can buy them without a broker. Some companies let you order participation shares online. The participation certificates of some large companies can be purchased via securities brokers on the SIX Swiss exchange or the Berne Exchange. Some participation certificates can only be purchased on exchanges.
It is very important to research a company’s fundamentals and that you trust its directors before you buy its participation certificates. The reason for this is that you will not have a vote in corporate decisions. The profits on participation certificates are primarily earned through dividends rather than capital gains, which means they are best suited to buy and hold investments. The long-term investment cycle of participation certificates and the lack of liquidity in the participation certificate market means you will want to believe in a company’s long-term future performance before investing in its participation certificates – as you would with illiquid shares.
As with other forms of securities, participation certificates are now primarily issued in book form rather than as paper certificates. Because of this, they must be held in a custody account at a custodian bank. Some companies offer free safekeeping services for their own participation certificates. When this is not the case, holding your participation certificates in a custody account with a low custodial fee is important because these fees directly deduct from your profit. If you buy participation certificates on an exchange, make sure to use a broker which charges low brokerage fees for purchases and sales. As a rule, the brokerage and custodial fees applicable to Swiss shares apply to participation certificates as well. You can compare brokerage and custodial fees using the interactive online broker comparison on moneyland.ch.
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