“Shock.” That’s the word the Private Equity International editorial team heard most frequently from members of the private equity community on 24 June, describing their reaction to the outcome of the UK’s referendum on EU membership.
And “shock” is what the markets felt too; the FTSE 100 plummeted from just over 6,334 points on the day of the vote to just over 5,800 points the following morning, before recovering to close at 6,138. Sterling nosedived to a 30-year low, falling from a high of $1.50 against the dollar as votes started to be counted on Thursday night to $1.33 at 5am on Friday.?Meanwhile, the price of gold spiked to a two-year high as investors sold riskier assets and sought a safe haven for their capital.
In the days and weeks since, the FTSE 100 has more than bounced back; as this issue went to press, it was at just over 6,900 points, its highest level since May 2015. Sterling, however, has not made such a speedy recovery, hovering at around $1.30 against the dollar.
This has not escaped the notice of international buyers. A low pound coupled with low interest rates presents a ”golden opportunity” for overseas investors, Florin Vasvari, a private equity-focused professor at London Business School, told us in July.
“You don't need to be an expert. If the pound is trading at a 30-year low relative to the dollar, that tells you that the pound is undervalued. It’s obvious to me this is the time to bring money into the UK. Buy pounds; you’ll be making 10 percent on the currency alone.”
Undeterred by the uncertainty swirling around the market in the aftermath of the vote, US cinema chain AMC Theatres, which is backed by Chinese conglomerate Dalian Wanda, agreed to acquire Odeon and UCI Cinemas Group from Terra Firma Capital Partners in a deal valuing the businesses at around £921 million (€1.1 billion; $1.22 billion).
AMC chief executive officer and president Adam Aron said that while the company “acknowledged” the uncertainties surrounding Brexit, “we are encouraged that current currency rates are highly favourable to AMC with the pound falling to a three decade low versus the dollar”.
But, behind closed doors, not everyone is feeling optimistic. In the week following the vote PEI took the temperature of the market in an anonymous online survey. Of the more than 300 respondents, 42 percent said the referendum outcome would have a negative effect on their business. Of the 96 GP respondents, 50 percent said investment activity had either dramatically or somewhat slowed, and 45 percent said fundraising would be negatively affected in some way.
Of course, at less than three months after a momentous decision with such wide-ranging consequences, the effects are only beginning to be felt; it will be years until the full implications of this referendum become clear. But as our Brexit Special explores, the approach on both the investor and the fund managers’ sides seems to be: hold fast. Don’t panic. Patient capital will prevail.