Brexit brings uncertainty; patient capital will prevail

The vote for Britain to leave the EU will bring market dislocation. It is time for private equity firms to show their mettle.

At 1pm today 500 clients will dial into a conference call hosted by one of London’s ‘Magic Circle’ law firms. For most of the private equity clients it is a call they would have signed up for in the hope that they would not have to attend.

The subject of the call is what clients should be thinking about now that Britain has voted to leave the European Union.

The result of yesterday’s referendum was not what the industry wanted; 75 percent of the individuals in private equity were in favour of a vote for Remain, according to a poll we ran in March. More than two-thirds of UK-based GPs felt their businesses would be worse of if Britain voted to leave.

Early market reaction suggests they are right to be concerned. In early trading this morning, sterling was down 6 percent against the euro and fell to levels against the dollar not since 1985.

We have spent considerable time at PEI exploring the reasons why the private equity industry was so staunchly in the Remain camp; there is no need to cover the same ground again, suffice to say that the economic argument – the desire to avoid an extended period of economic and regulatory instability – had trumped issues relating to sovereignty or border control. This view was sadly not replicated among the voting British public.

With a Leave vote now confirmed there is much to be unpacked from legal perspective. We will endeavour – along with our sister title privatefundsmanagement.net – to help readers make sense of developments over the coming weeks, months and, most likely, years. A good starting point is this commentary from Hogan Lovells’ Amanda Onions, which considers a number of variables, including the future ability of UK fund managers to raise capital in the European Union.

The result has implications for EU nationals working in Britain, who will no longer have the automatic right to do so. This is particularly pertinent to an industry for which London is a European hub. Because of this hub status, the London offices of European and global private equity firms are home to many different nationalities: one mega firm we spoke this week said that over a third of its London office is non-British. While it is unthinkable that a ‘Leave’ vote will now mean expulsion for a third of the private equity professionals in the city, it has introduced an unwelcome question mark over their short-term future.

Predictions for what will happen to deal activity and fundraising are, at this stage, pretty futile. What we do know, however, is that there is still capital to invest and companies that need capital.

This week PEI met with Gerry Murphy, chairman of Blackstone Europe and newly installed chair of industry body Invest Europe. In the event of a Brexit, Murphy anticipated a period of market dislocation and uncertainty. Equilibrium would return, he said, but it “could take a while”.

In the face of this uncertainty, private equity will prevail, said Murphy. “One of the great advantages of private equity is through a crisis or a challenge it can hunker down and play a long game.”

“I don’t expect – at least I hope – that any post-Brexit period of uncertainty will be nothing like what we went through in 2008, and our industry came through that crisis in quite good shape.”

Private equity firms tend to rate their investment capabilities quite highly. The industry’s performance during the financial crisis lends credibility to this belief. In these times of volatility, it is time for them to show their mettle.