The British Private Equity and Venture Capital Association (BVCA) expects depressed exit activity following the UK’s referendum on European Union (EU) membership to be compounded by the industry’s reliance on secondary sales.
The industry body notes that secondary sales have consistently represented 15-20 percent of divestments in recent years.
“Given that we would expect investments to be constrained in the short term, this could have a further constraining impact on secondary exits, which will amplify any issues that exits face,” it said.
The BVCA has put together a “Guide to Brexit” to walk its members through potential post-referendum scenarios and how they could impact the private equity and venture capital industries.
The document sets out “high level considerations” such as the different options for the UK’s future relationship with the EU, potential impacts on investments and exits, the possible effect on the fundraising environment, and regulatory considerations.
“The key question that will impact private equity and venture capital is whether this relationship includes access to the single market,” the guide reads.
“The identity of the next Prime Minister, and the direction of the future relationship that they will seek with the EU, is something that the BVCA will be watching intensely over the coming weeks.”
The industry body stressed that the longer negotiations take, the longer the period of uncertainty will continue, which would be “of significant detriment” to UK private equity and venture capital.
The BVCA considers membership of the European Economic Area, the same relationship Norway has, as “the most desirable for the PE and VC communities, as it would provide the greatest level of protection for our industries”. However, the association concedes that this option is unlikely to be palatable to ‘Leave’ voters.
All other possible models limit access to the single market, and are therefore less appealing for the private equity and venture capital industries.
The BVCA expects investment activity to be dampened in the short term while uncertainties around the exit timeline and access to the single market remain. The effects beyond that are as yet unknown, although if continued access to the single market is secured then “it is possible that the long-term impact of exit from the EU on investments could be low”.
“Private equity and venture capital are long-term asset classes, and as proved by the low levels of default over the financial crisis, has proven its ability to weather periods of economic uncertainty.”
It is also likely that Brexit will have a negative effect on fundraising in the near term. The BVCA noted the important role of investment from the European Investment Fund and institutions such as the European Regional Development Fund, and that “any loss of this funding could prove damaging to the industry”.
On the regulatory side, the BVCA stressed that nothing would change until the UK concludes the process of leaving the EU, and in the meantime any EU regulations currently in place or introduced in the interim will apply.
“We will, however, have little to no negotiating power as a country over EU financial services,” it said. “We would expect that the views of Britain, particularly on financial services regulation, will be disregarded.”