How can private equity prepare for the challenges of populism?By Michael Collins on 21 February 2017
Michael Collins, Chief Executive of Invest Europe, gives his insight on how private equity can prepare for the challenges of populism.
Developments in the US and the UK over the last year suggest a move towards more nationally-focused policies and away from multilateralism and international cooperation. What are the potential implications of this rise of populist politics for private equity and how can fund managers prepare?
One immediate impact is an increase in uncertainty about public policy and the questioning of some of the principles on which it has rested for a decade or more.
President Trump is implying the reversal of US policy on free trade, with his ‘Buy American, Hire American’ message, the US’s departure from the Trans Pacific Partnership, and the questioning of the North American Free Trade Agreement (NAFTA). Comprehensive tax reform is back on the agenda and while there may be underlying merit in a simpler tax code, the zeal for change comes in no small part from a desire to see the repatriation of those US corporate profits that are sitting overseas, often in Europe. And even if the ban on entry to the US from certain countries is overturned by the courts, a tightening of the criteria for issuing H-1B visas, which are used widely by venture capital firms and in the tech sector, looks to be on the way.
Populism in Europe is generating no less uncertainty. Following the shock of the Brexit vote last summer, this year’s wave of national elections could strike right at the heart of the EU. Geert Wilders’ Freedom party wants to take the Netherlands out of the EU and could gain more traction following the Dutch elections in March. In May we will see the French Presidential elections and far-right Front National leader Marine Le Pen is promising a referendum on EU membership if she wins. Germany votes in September and Frauke Petry, leader of Alternative für Deutschland, voices increasingly anti-EU messages. Fresh elections could also take place in Italy this year and almost certainly lead to gains for the anti-EU Five Star Movement led by Beppe Grillo.
Even if these parties do not ultimately form the next government in each of these countries, support for them puts pressure on the established parties, forcing many of them to start to caveat their commitment to freedom of movement for people, goods, capital and services.
Our data shows that European private equity thrives on its ability to raise capital globally, with 40% of fundraising coming from investors in the rest of the world. Fund managers looking to add value to portfolio companies also seek to employ the best talent, wherever they are located, so any advance in populism and economic nationalism has the potential to be disruptive.
So what can private equity firms do now to protect their interests?
Invest Europe has just published our latest Public Affairs Overview which is available to members to download from our website. It outlines the key EU and international policy proposals that could impact our industry and the business environment in which it operates, as well as what we’re doing to respond. Our monthly policy calls provide the chance to ask questions and hear the latest updates on Brexit and other issues affecting fund managers across Europe.
With so much uncertainty it can be hard to make concrete plans. But firms can and should be thinking about different scenarios and what they might mean them. Firms doing business in and with the UK, for example, can refer to Invest Europe’s Q&A briefing on the UK’s exit from the EU, which outlines the pertinent planning questions for fund managers and investors.
Talk to your peers.
The annual Investors’ Forum in Geneva this March is an opportunity for investors and fund managers to meet in a non-commercial environment. It’s an important platform to discuss some of these issues and to share ideas on how GPs and LPs can navigate them together. The CFO Forum in Berlin in May will provide a further opportunity for more detailed discussions.
Support the industry.
Part of Invest Europe’s role is to explain to policymakers and other stakeholders how private equity plays a vital role in channelling capital from investors into businesses, driving jobs, innovation and growth and why the imposition of new barriers should be avoided. Fund managers and investors can play their part by getting involved with our public advocacy and industry promotion efforts, responding to consultations, or providing data or case studies, all of which can help influence the public debate.
Private equity fund managers and investors need to think about how their firms, their investments and their portfolio companies could be affected by a fundamental shift towards economic nationalism and they need to be ready. Ready to adapt, but also ready to participate in and to shape the debate.
First published in PrivateEquityInternational.com