By an almost four percentage point margin, the British people have voted to leave the European Union, and the Prime Minister has announced that he will stand down in October. Market uncertainty will now make the UK a very challenging environment for investors for some time – although no doubt there will be opportunities, especially for non-sterling denominated funds. The many and varied impacts of the UK's decision will be felt domestically and internationally, and the financial effects it will have on existing portfolio companies, pending deals, and the investing environment more generally will be a major near-term focus.
But, while there will also be a huge amount to discuss and agree as regards how this affects the legal and regulatory environment, it is important to remember that nothing has yet changed: EU law continues to apply in the UK, as do UK laws derived from the EU. (For KWM's summary of the impact of yesterday's vote on various sectors, click here.)
Indeed, it will take years to unravel the full ramifications of the vote, and the UK government is not in a hurry to trigger the two year "divorce" period set out in the Treaty, preferring to prepare the ground at home (which includes choosing a new prime minister) and to have discussions with other key European players first. In the short term, policy-makers and central bankers will be working to reassure and stabilise the markets, before they turn their attention to other matters, while the EU's institutions will be looking at ways to contain any possible contagion to other member states (which may include taking a hard line in negotiations with the UK).
However, now is not the time for the private equity and venture capital sector to watch from the side-lines. On the contrary, a period of intense activity must now begin, so that the voice of private equity is heard as part of a concerted effort from the financial services industry to first formulate and then express its views on what it wants from the difficult negotiations which will now ensue. That is true for other EU-based fund managers, as well as those in the UK, and it remains critical for the industry to work together across the EU to establish a common position and to do its best to influence the negotiations from both sides. At the same time, firms need to start mapping out, on the basis of the most likely conclusions of those negotiations, how they may need to re-structure their businesses to respond to the new environment.
The Alternative Investment Fund Managers Directive (AIFMD) has been, of course, a major focus for private equity firms across Europe and beyond in recent years, and it is unlikely that UK-based managers can expect a huge wave of de-regulation. There may be opportunities for improvements, especially for those funds who do not wish to actively market to EU-based investors, but any deregulatory effects will be gradual and marginal. In the near-term, the focus is likely to be on securing two-way market access on the best possible terms, rather than sweeping away EU-based financial services law, although it is far from clear whether that will be achievable.
And there are many other issues for the industry to consider, not least for those in the venture capital sector who have enjoyed significant benefits from the EU. Losing access to the marketing passport for venture capital funds would be a blow, especially as the regime looks set to be improved in the coming years. Investment from the European Investment Fund for example, a cornerstone investor for many funds, must also now be in doubt. Perhaps the British Business Bank will step into that breach.
For other EU-based managers, the loss of a British seat at the negotiating table (supported by the strong voice of the UK industry) will be unhelpful as further financial services measures are discussed – not just the scheduled review of AIFMD, but also ongoing regulatory initiatives. Strategies to deal with that change of dynamic will be high on the agenda for the European financial services industry.
If you would like to discuss the implications of today's decision, the potential medium term regulatory consequences, and the wider potential impact and opportunities then please get in touch with your contacts at King & Wood Mallesons who are on standby to assist you. Our pan-European funds team can advise on the optimal structuring options for funds and fund managers.