In the weeks following Britain's referendum to leave the European Union (EU), multiple options for ways of proceeding with the decision have been discussed. Britain could opt for the Norway option of maintaining free trade with the EU, but limit the free movement of citizens, or cut off ties entirely.
Private equity service providers told Private Equity International that the drop in value for the pound will create a favorable environment for investing, but also devalue the existing UK assets of investors.
As of Friday, the exchange rate of £1.33 to $1 is extremely low, compared with the previous average rate of £1.50 to $1 in the six months leading up to Brexit. “For FX volatility in the short term with the sterling depreciating, some people are looking at that as an opportunity to buy assets in the UK. But if you've got a fund at a selling point, depending on what the currency may be, the fund may be of lower value than it used to be,” Ian Kelly, chief executive officer of fund administrator Augentius , based in London, said in a call.
“I think volatility always creates opportunity, depending on how you look at and react to this situation,” he added.
Already, a £3.7 million European Regional Development Fund that had agreed to support more than 600 tech startups in London through the UK government and European investors has suspended funding. Ryanair has cut back on UK routes in favor of European routes. And 52 percent of UK businesses report being less optimistic about the UK economy – even lower than the 64 percent of business that said the same during the recession in 2009, according to a quarterly business survey by the Confederation of British Industry in July.
“In the near term, we may see a valuation blip for private equity managers, with companies valued with reference to public comparables, along with a slowdown in exit activity,” Amy Schondra, head of private equity at Philadelphia-based Hirtle Callaghan , said in an email. “On the flip side, a weaker British pound may encourage more opportunistic investors to take a closer look at deals in the UK. We may see an uptick in the number of distressed assets for sale, particularly off of banks' balance sheets, along with an increase in secondary activity as some investors re-assess their desire to hold assets in the UK.”
Both Kelly and Schondra cited that as the situation develops, details will become clearer.
As for businesses moving their operations out of the UK as a result of Brexit, Schondra said: “We just don't envision it at this point. And, in speaking with the managers within our own private equity portfolio, we are hearing little concern for the economic viability of existing holdings domiciled within the UK in the long term.”