No one doubts that the UK is now entering a period of intense uncertainty – and faces a great many challenges – as it first contemplates what type of relationship it wants to have with the EU, and then tries to negotiate that relationship. But the impact on other EU member states will also be profound, and there will be both opportunities and costs for private equity and venture capital firms right across the continent. We surveyed our European offices to better understand the wider reactions of firms and markets.
Understandably, while emotions have been running high in the UK, reactions have so far been less violent on the other side of the English Channel. Although there were exceptions, most local private equity houses based in other European financial centres are not unduly concerned by the prospect of a Brexit, with deals generally proceeding as normal. However, many recognise that in discussions on financial services matters, the UK was an important ally and – with the UK’s power and influence in the EU already draining away – negotiations over financial services initiatives will probably now be more difficult. The Luxembourg Private Equity & Venture Capital Association strongly reflected that sentiment in a statement issued last Friday – even though it is probably the country with the most to gain in new fund structuring opportunities from a Brexit.
Indeed, although many have been emphasising the benefits to Luxembourg, there may be more downsides than commonly appreciated: a Bertelsmann Stifung policy brief in 2015 claimed that Luxembourg would be the second "biggest loser" after the UK in the case of a Brexit, estimating that the GDP per capita in the Grand Duchy would drop between 0.48 and 0.81% (against a drop of between 0.10 and 0.36% in the remainder of the EU). It remains to be seen whether those expert predictions were well-founded.
As for attitudes to investing in the UK in the short term, views are – perhaps not surprisingly – generally negative. No doubt currency movements will create opportunities, and some sectors may look more attractive than others, but uncertainty is making many European funds sceptical about their willingness to invest in UK-focused businesses in the near term. This may only be a relatively short term impact, with one of our more optimistic German partners arguing that after a summer headache, international investors will re-assess their attitude to the UK and may well see the opportunities more clearly.
One thing does seem evident, at least to our Luxembourg office: the process of investing from the UK into the EU will get more costly, lengthy and complicated, and more complex multi-jurisdictional structures may be needed to accommodate future changes. And although the exact nature of these changes are uncertain, funds investing now will have to think about adopting structures that are likely to remain robust after a Brexit becomes effective – probably at least two years away. Furthermore, our French colleagues identified that investors in UK entities may be, going forward, at risk of losing the benefit of the current favourable tax regime in France applicable to investments in EU entities – although they hope grandfathering provisions will be put in place for investments made before the date of departure of the UK from the EU. This is likely to be a concern shared with other EU member states.
Of course, there is a history of healthy competition within Europe, and London's loss may be other countries’ gain. Paris Europlace, the semi-official think-tank of the finance industry in France, issued a press release emphasising the virtues of Paris as a financial centre. In Germany, the view (or, perhaps, hope) is that the European centre for financial technology, or FinTech, could start to move there from London. Similarly, our Italian colleagues flagged that, following the implementation of the Alternative Investment Fund Managers Directive, a number of Italian fund managers had been considering moving their operations outside of Italy: the UK had been seen as the preferred option but, with the prospect that the UK might lose its EU marketing and management passport, Luxembourg is now top of the list. Meanwhile, the new partnership-like fund structures in France could provide viable alternative vehicles. However, for the time being, clients are considering their options rather than taking precipitate steps to act on them.
Many across Europe are considering what London’s response will be to this threat, and it is commonly assumed (in particular by the French press) that tax changes and de-regulation will be a focus for the (very busy) UK government as it tries to encourage asset managers to stay put. If there is de-regulation, this might take the form of a twin track regime, one for those wanting to access the EU, and one for those who do not. Whatever the outcome, it seems that competition between financial centres is destined to hot up.