On both sides of the Atlantic, political debate is being dominated by scenarios previously considered too far-fetched to be taken seriously. In the US, it’s the prospect of Trump vs. Sanders. In Europe, it’s the idea that British voters could choose to leave the European Union.
The so-called ‘Brexit’ is no longer an abstract thought. It’s a real possibility. An average of six polls taken in the last three weeks show 49 percent of British voters in favour of leaving, which would leave the region’s private equity industry facing a number of difficult decisions.
“People are talking about it, people are thinking about it at quite a high level,” said Tim Hames, director of the British Private Equity and Venture Capital Association (BVCA), during a panel debate on how a Brexit would impact financial services.
“Particularly in the event of a leave victory there will be some quite profound and detailed considerations which institutions would need to undertake.”
But, he added at the event hosted by Dechert, there had been “relatively little active preparation thus far” among BVCA members. Calls to market sources suggest the same – with most unwilling or unable to discuss what potential plans their firms were drawing up.
Of course, a major hurdle to coming up with a post-Brexit action plan is that nobody – not even British Prime Minister David Cameron – knows exactly what an “out” vote would mean.
Would the UK push to remain part of the European Economic Area and participate fully in the single market, like Norway? Would it argue for the Swiss model, which would give some access to the single market in specific sectors? Would it seek to follow the Canadian model, based on a free-trade agreement with the EU? Would it try to negotiate something different entirely?
Among the unknowns particularly pertinent to UK and pan-European fund managers are whether there will be restrictions on their ability to both fundraise and deploy capital within the EU. Will they have the freedom to base parts of their operations in EU countries? How will certain sectors in which they invest be affected, particularly when the UK’s no longer at the EU negotiating table?
While fund managers can’t be expected to know all the answers, they can start mapping out exactly how their funds, investors and portfolio companies are affected by EU regulations and begin planning for different scenarios.
This, in turn, will identify potential problem areas and could have an impact on investment and marketing decisions over the coming months. The private equity community as a whole must consider what an ideal post-Brexit UK would look like, and how it would lobby for that outcome should the time come.
With signs pointing strongly to a referendum as early as 23 June it’s crucial GPs wake up to the reality of the situation, or risk facing the wrath of investors if they end up in a post-Brexit world without a game plan.