Costs of Brexit for private equity firms include establishing offices and relocating people


Private equity firms are considering how to limit the expected negative impact of Brexit on fundraising and their British portfolio companies, according to industry advisers.

Buyout houses concerned about how tariffs will work once the UK leaves the European Union are ensuring their portfolio companies are applying for licences and authorisations that will help facilitate trading, one adviser said.

Sectors that could see the most trouble include highly regulated industries such as pharmaceuticals and aerospace; retailers reliant on shipping products in and out of the UK; and companies with large international workforces such as hospitality.

The costs of Brexit for private equity firms include establishing offices and relocating people. For UK portfolio companies, moving warehouses to an EU country, for instance, could be expensive.

Here is a round-up of some edited opinions on Brexit from private equity executives:

Patricia Volhard, partner, Debevoise & Plimpton
“Whatever the final shape of Brexit scenario, things such as talent management, marketing, structuring, etc, will become more complex. However, even in a no-deal Brexit scenario, there are unlikely to be any entirely closed doors.

“Take the marketing of funds as an example. Sponsors will likely still be able to market their funds where they need to, assuming there will be cooperation agreements in place.

“Work has been under way by the majority of sponsors for some time. We’ve been helping clients review their processes and structures, and making decisions on how best to update them to ensure they can still achieve their aims in the post-Brexit world.

“For some, that has meant relocating their new fund structures and some functions. For others, that has meant even restructuring existing funds.”

Philip Hines, UK private equity leader, PricewaterhouseCoopers
“While efforts continue to secure an exit deal, private equity firms are increasingly preparing for different Brexit scenarios at a fund and portfolio company level. This includes work to assess customs, trade, immigration and wider strategic business plan considerations. The impacts on portfolio companies will vary by sector, but larger portfolio companies with regulatory and operational complexity such as financial services, chemicals and transport could be most impacted.”

Paul Dolman, head of private equity, Travers Smith
“There are the obvious macroeconomic issues [relating to] what will it mean for the economy and microeconomic issues involving specific sectors. For example, the impact on the consumer sector and health care, or the restricted freedom of movement of skilled employees. [But] by far the greatest fear is a series of events that could result in a Jeremy Corbyn-led Labour government. I think it is the risk of this — however unlikely — that is making sponsors pause for thought, rather than a hard or soft Brexit.”

Mark Brenke, co-head of private debt division, Ardian
“Brexit has clearly [led to] a reduction of mergers and acquisitions deals in the UK — across Europe as well but specifically in the UK — because of the increase of uncertainty in the market. The UK is the largest private equity market in Europe and also the largest debt market. We don’t know if it is going to be a hard Brexit or a soft Brexit, and the uncertainties have the potential to increase volatility in the market.

“From our perspective as a long-term fund backed by long-term investors that pay us to take a long-term view, we get paid to look though the short-term volatility. Short-term volatility for us can be a good thing if we have done our homework correctly. We are convinced that the [direct lending] business in four or five-year time will continue to be a growing industry in the UK, because [these lenders] have a dominant market position.”

Janet Brooks, managing director, Monument Group
“Until we know what form it ultimately takes, it’s difficult to say what the impact of Brexit will be for private equity. It’s clear, though, that a no deal Brexit could affect UK firms’ access to the EU’s investors, which would be very detrimental to the funding of the UK private equity industry. Private equity firms can put contingency plans in place, but it’s expensive to do and therefore is likely only to be done by the the larger UK firms, leaving small UK-based funds more vulnerable.”

Tristan Nagler, managing director, Aurelius Equity Opportunities
“In terms of the deal landscape, one consequence we have already seen from Brexit is an upswing in the number of corporations considering carve-outs of their UK assets. To some extent, it is important not to be engrossed by Brexit, as there are so many other important issues that private equity firms need to consider.”

Eric Lawson-Smith, partner, Arma Partners
“Despite the uncertainty associated with the Brexit process, the UK’s ecosystem of companies in verticals such as software, fintech, internet and communications continues to rank among the most sophisticated in Europe. With technology having become increasingly central to private equity firms’ investment strategies in recent years, and a relative scarcity of high-quality tech assets already driving deals at premium multiples, we expect that deal volume within the UK tech sector will remain resilient in the face of this medium-term concern about geopolitical risk.”

 Source: Financial News

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