Leaving the Single Market: What Brexit could mean for private equityBy Michael Collins on 28 February 2017
Following British Prime Minister Theresa May’s speech in January and the Brexit white paper on 2 February, we now know the government’s intention is that the UK will leave the EU single market. But what does this mean for private equity?
For an industry with pan-European fund managers and investors, there’s no doubt that the consequences of a ‘hard Brexit’ could be significant. The main issues affecting private equity and its investors as a result of this decision are passporting, trade and talent, so I will outline each in turn.
It’s almost inevitable now that UK-based private equity firms will no longer be able to promote their funds to investors in the remaining 27 EU member states using their existing marketing passports. But there could be other options.
May asserted in her speech that the UK would like to ensure “the greatest possible access” to the EU market and could seek elements of the current single market agreements for financial services. Passporting for private equity could conceivably be part of this deal. Just one of the many scenarios to be thrashed out during the two-year negotiation window.
If no specific UK-EU regime is agreed UK fund managers could try to use the ‘third country’ passport provided for in the EU’s Alternative Investment Fund Managers Directive (AIFMD). This was designed as a way for managers from eligible non-EU countries with compatible financial market rules to access EU investors. In theory the UK should have few problems satisfying the AIFMD criteria.
However, progress has been so tortuously slow that even after three years of discussion, proposals and recommendations, the passport is still not available to a single non-EU manager.
National fund marketing regimes (so-called ‘private placement’) remain a crucial fall-back option, but even these are not certain. EU member states have almost-complete flexibility over the terms of their national regimes and may change their rules in light of Brexit; and they could disappear altogether following the review of AIFMD, planned for the second half of 2017.
For venture capital managers the options are even more limited. There is simply no provision for the marketing passport available to venture capital managers under the EUVECA Regulation – the EU’s tailored regime for this part of the industry – to be extended to ‘third-country’ fund managers. May did indicate that the UK would consider contributing to some EU programmes post-Brexit to secure continued access. It’s feasible that this could include one of European VC’s most crucial investors, the European Investment Fund, though this has not been said explicitly.
May’s vision of a hard Brexit also has a potentially costly impact on companies backed by private equity. Britain’s planned withdrawal from the EU Customs Union raises the prospect of new trade barriers in day-to-day business. Customs duties could be levied on goods travelling between the EU and the UK, disrupting essential supply chains. New administrative burdens could be imposed creating higher costs of doing business.
Highly skilled professional talent continues to be in huge demand by private equity firms and their portfolio companies. But access to this talent could be hit by May’s explicit plans to withdraw from the free movement of people. It’s unclear how this will impact on UK firms’ ability to attract and retain the best candidates from the EU talent pool.
Indeed, much about Britain’s stance and that of the EU 27 remains uncertain. However, private equity must get ready now for a new regulatory environment. Invest Europe has been helping its members prepare with a Brexit Q&A publication and regular policy updates. Our member events and the Investors’ Forum in 2017 will provide further opportunities for us to communicate up-to-date knowledge with our membership, and for those fund managers and investors to share information.
Private equity firms are already considering important issues, such as how to structure their businesses in a post-Brexit world. These plans will be critical for providing continued returns to investors as well as support for portfolio companies and their eight million employees across the continent. But this industry thrives on uncertainty and private equity’s resourcefulness leaves it better placed than many industries to maximise the opportunities that will emerge from this latest chapter.