With the pandemic throwing the world into chaos, private equity market participants will have been forgiven for having put Brexit concerns to the side this year.
And yet, with less than one month to go until the end of the UK’s transition period out of the EU, the reality of Brexit is truly around the corner.
I recently caught up with Ed Hall and Ravi Chopra, partners at law firm Goodwin, to get the lowdown on fundraising, passporting and operational issues. Two things stood out:
Some markets are friendlier than others
Administrative bodies in the EU could face a backlog of applications from UK managers that want to set up AIFMs at the last minute so they can market to local investors. Some national regulators have been more proactive than others in wooing GPs. France’s financial regulator has offered review processes in English to facilitate managers setting up AIFMs in the country, streamlined certain processes, such as pre-authorisations, and offers a shortened timeline of two months.
Norway is also considering transitional arrangements where GPs that have already been marketing there may be allowed to convert into its national private placement regime on the basis they have already been “passported” in the country, Chopra says. There could be other jurisdictions open to managers filing early for their national private placement regime now, to prevent any potential passporting issues from 1 January, 2021.
Frontloading hasn’t been possible for all GPs
Most private equity managers have been preparing for the Brexit transition since the 2016 referendum result, and many will have been frontloading their marketing efforts and offering existing funds to EU-based investors. Still, some GPs and funds will have fallen through the cracks, warns Chopra.
“It hasn’t been feasible for everyone,” Chopra says. “Some GPs may not have had a fund product to show anyone. In certain funds, you’re contractually prohibited from even marketing the successor fund until you’ve got to a certain level of investment on the prior fund. Those kinds of people would find it very hard to be frontloaded. Equally, there may be managers who just may not be ready until 2021.”
Then there is the impact – as yet unknown – of the wider process on portfolio companies. The risks, whether they relate to staffing, product regulation or supply chains, will be different for each individual portco depending on their business. “The question of a trade deal is going to have a massive effect on a number of different portfolio companies. There are going to be some questions raised around that for some time,” Hall says.
The regulatory uncertainty wrought by Brexit may seem quaint by 2020’s standards, but it will make the Christmas holidays less relaxing than normal for UK-based GPs.