There may be three months still to go until Britain’s referendum on membership of the European Union, but the impact of 23 June is already being felt.
“People are talking about it, people are thinking about it at quite a high level,” Tim Hames, director of the British Private Equity and Venture Capital Association (BVCA), said during a panel debate in February on how a Brexit would impact financial services.
“Particularly in the event of a leave victory there will be some quite profound and detailed considerations which institutions would need to undertake.”
Industry insiders are divided on whether leaving will have a material impact on either performance of portfolio companies or on managers’ ability to fundraise – once the confusion around where it will leave UK managers with regard to AIFMD passporting has been ironed out.
But there is general agreement that the referendum – regardless of the outcome – will have a negative effect on activity in at least the first half of this year.
“One issue will simply be the market and volatility. I think two or three weeks before [the referendum] no-one is going to do anything because the market will be in turmoil,” says Simona Maellare, who co-heads the global financial sponsors business at UBS.
“If I’m buying or selling a company, I don’t want to go to the markets and do a high-yield bond in June, and probably I won’t plan to do it at the beginning of July, because I don’t know how the markets are going to be. So activity will be impacted anyway, but it’s not so much the company and the investment, it’s more the execution of the loans and the bonds.”
In the first weeks of 2016 to mid-March, there were 127 private equity-backed acquisitions in Europe worth a combined $6.36 billion, while 55 exits valued at $13.79 billion were completed, according to data from Dealogic. This represents a marked slowdown compared with last year. In Q1 2015, 210 acquisitions worth $18.1 billion closed, while 119 exits worth $28.75 billion were completed.
“Clearly there is a slowdown, but we also have to put that in context of where we’re coming from,” says John Gripton, managing director at Switzerland-headquartered asset manager Capital Dynamics. “Last year and the year before, the amount of money put to work was significant. Inevitably there’s got to be some slowdown.”
However, it’s likely that the macroeconomic turmoil of the first quarter isn’t yet reflected in the data. Industry insiders have indicated to Private Equity International that while they’ve been keeping busy finishing off long-since agreed transactions, the pipeline for new deals is looking much quieter.
“As we go past Easter [Brexit is] going to be very much top of the agenda,” Gareth McCartney, head of EMEA equity syndicate at UBS, told journalists gathered at a breakfast briefing in London in March. “For the UK market it’s a very material issue.”
Maellare agrees that the effects of the uncertainty could likely stretch into the third quarter.
“The referendum will create a summer that will start earlier than usual, and a lot of processes will be pushed until after August,” she says.
“I think [GPs] are concerned, because last year all these private equity [houses] went out and sold everything they could. This year they said, ‘We need to buy, this year we need to put money to work.’ I don’t think it will be easy because of this. I think in a year when you want to invest, to have a period where transactions will be frozen for one or two months, it is not good. So they’re worried. I think the volume of deals this year will not be what we wished for at the beginning of the year.”
UK firms investing in UK businesses that are largely dependent on the UK for their revenues are generally expected to keep on investing.
However, those firms for whom Britain is an optional geography are likely to focus their attentions elsewhere.
“Anyone with a more global view, [such as] American and pan-European private equity firms looking at the UK, will take their time and be more cautious on M&A activity into that geography, if only for currency reasons,” says Callum Bell, head of corporate and acquisition finance at Investec.
Maellare puts it more bluntly: “Investment committees are uncomfortable putting money to work in UK-exposed businesses.”
However, Brexit is not the only macro concern investors have on their minds, and the UK is not the only geography they are approaching with caution.
As UBS head of M&A in EMEA Severin Brizay told the London breakfast briefing, “volatility is the enemy of M&A”, and in the first quarter world economies have experienced volatility in spades.
Concerns around oil prices, the slowdown in China, US stock market uncertainty and the unpredictability of the upcoming US presidential elections, to name a few, have given investors pause for thought.
“Brexit just adds another uncertainty alongside a couple of other big ones that are out there and that have caused quite a lot of stock market volatility year to date,” Bell says.
“Having a stable economy, a stable governance system and a stable environment for investment activity is pretty crucial when you’re buying companies and trying to grow companies. If you think that uncertainty is going to exist, you will see both pricing and dealflow change because people won’t be comfortable around what they’re buying.”
For now at least, for those that can, it seems waiting and watching is likely to be the preferred option.
“[Why would you risk] being caught in the middle of the storm when you don’t really need to?” Maellare says. “Everyone can wait a couple of months either to buy or to sell. In the context of a market that’s not liquid, it’s the rational thing to do.”