The closer the UK's referendum on membership of the European Union looms, the greater it seems is the uncertainty over what a 'Brexit' vote would mean for the private equity industry.
UK fund managers planning to go to market at or around 23 June – the day of the vote – may have to reconsider how they will go about raising capital in continental Europe, says Sally Gibson, partner in Debevoise & Plimpton's investment management group.
One of the central distinctions drawn in the Alternative Investment Fund Managers Directive (AIFMD) is between European fund managers, who have access to EU marketing passports, and non-European fund managers, who do not.
If Britain were to exit the EU, it could result in pre-Brexit UK fund managers becoming non-EU fund managers that do not have access to the passport, says Gibson.
This scenario currently poses a number of questions: When would the crossover happen? At what point would fund managers stop being classed as European fund managers and move into the non-European fund manager category? And what happens if, during the crossover period, the fund manager is in market trying to raise money from European investors?
“I imagine there will be some interim period for the crossover, but it is not clear what the fund manager's position will be during this interim period,” says Gibson.
According to Andrew Hood, senior director of international trade and government regulation at Dechert, GPs should be thinking about the potential effects of Brexit in order to demonstrate to both investors and boards that they have given it consideration and can respond as quickly as necessary post-vote.
If British voters decide to exit Europe, a decision will need to be made about whether it wants to be free from EU regulations or push to become part of the European Economic Area (EEA). The latter would allow Britain to be part of the EU's single market and receive a large number of benefits. However, it would not reduce EU regulatory burdens.
“The government is going to have to decide what the 'no' vote represents. Does it mean we want to be entirely shot of the EU, including all the regulation that goes with it, or does it simply mean that we want to downgrade to an EEA type arrangement?” says Roger Matthews, senior director of international trade and EU at Dechert.
Another question is whether Britain will decide to keep EU regulations like AIFMD if it leaves and does not become a part of the EEA.
“I can imagine there might be quite a sense that Britain will keep it [AIFMD], for one of two reasons: either simply because it's now there and everyone's adjusted to it; or because it's the same regulation that everyone has in the EU and if there's consideration of extending passporting to non-EEA firms… then we [Britain] would be well-placed to benefit from it if we have substantively the same regulation as the EU,” says Matthews.
The difficulty at the moment is that nobody knows which way the Brexit decision will go. According to the What UK Thinks: EU Poll of Polls at the time of going to press, the referendum was on a knife-edge with 49 percent of voters in favour of an exit.