Developments in the US and the UK over the last year suggest a move towards more nationally-focused policies and away from multilateralism and international cooperation. What are the potential implications of this rise of populist politics for private equity and how can fund managers prepare?
One immediate impact is an increase in uncertainty about public policy and the questioning of some of the principles on which it has rested for a decade or more.
President Trump is implying the reversal of US policy on free trade, with his ‘Buy American, Hire American’ message, the US’s departure from the Trans Pacific Partnership, and the questioning of the North American Free Trade Agreement (NAFTA). Comprehensive tax reform is back on the agenda and while there may be underlying merit in a simpler tax code, the zeal for change comes in no small part from a desire to see the repatriation of those US corporate profits that are sitting overseas, often in Europe. And even if the ban on entry to the US from certain countries is overturned by the courts, a tightening of the criteria for issuing H-1B visas, which are used widely by venture capital firms and in the tech sector, looks to be on the way.
Populism in Europe is generating no less uncertainty. Following the shock of the Brexit vote last summer, this year’s wave of national elections could strike right at the heart of the EU. Geert Wilders’ Freedom party wants to take the Netherlands out of the EU and could gain more traction following the Dutch elections in March. In May we will see the French Presidential elections and far-right Front National leader Marine Le Pen is promising a referendum on EU membership if she wins. Germany votes in September and Frauke Petry, leader of Alternative für Deutschland, voices increasingly anti-EU messages. Fresh elections could also take place in Italy this year and almost certainly lead to gains for the anti-EU Five Star Movement led by Beppe Grillo.
Even if these parties do not ultimately form the next government in each of these countries, support for them puts pressure on the established parties, forcing many of them to start to caveat their commitment to freedom of movement for people, goods, capital and services.
Our data show that European private equity thrives on its ability to raise capital globally, with 40 percent of fundraising coming from investors in the rest of the world. Fund managers looking to add value to portfolio companies also seek to employ the best talent, wherever they are located, so any advance in populism and economic nationalism has the potential to be disruptive.
Private equity fund managers and investors need to think about how their firms, their investments and their portfolio companies could be affected by a fundamental shift towards economic nationalism and they need to be ready; ready to adapt, but also ready to participate in and to shape the debate.
Michael Collins is the chief executive of Invest Europe, the association representing Europe’s private equity, venture capital and infrastructure sectors, as well as their investors.