Brexit special: No sudden movements from LPs

There is no denying that the outcome of the Brexit referendum ruffled feathers among the naturally cautious limited partner community. Globally, more than 40 percent of LPs intend to decrease their commitments to UK-focused funds, according to a Private Equity International survey, while almost one in 10 is considering selling stakes in UK-focused funds on the secondaries market.

Among UK-based LPs the picture was even starker: nearly 65 percent said they would be decreasing commitments to UK-focused funds, and 27 percent are considering selling UK-focused fund stakes.

However, although investors are unnerved, they don’t appear to be panicking.

“One of the great advantages of private equity is through a crisis or a challenge it can hunker down and play a long game, and that’s exactly what we would do,” Gerry Murphy, chairman of Blackstone Europe and industry body Invest Europe, told PEI in an interview on 23 June as Britain headed to the polls.

“I don’t expect – at least I hope – that any post Brexit period of uncertainty will be nothing like what we went through in 2008, and our industry came through that crisis in quite good shape.”

In the aftermath of the global financial crisis – with the eurozone’s sovereign debt crisis, a potential Grexit or dissolution of the euro looming large – LPs gave European funds a wide berth.

“Today, the picture is somewhat different,” says Josh Lerner, a professor of investment banking at Harvard Business School and leading expert in private equity.

“Yes, there are still macroeconomic risks in Europe, but where in the world does not have such risks? So for many investors, the case for underweighting European private equity is much less compelling.”

Indeed, LP interest in pan-European funds has remained robust. Just a day after the Leave vote, the Tennessee Consolidated Retirement System committed nearly $300 million to BC European Capital X, citing underexposure to Europe and the hope that the UK’s riskier environment could result in lower pricing and higher investment returns.

Singapore’s GIC, which invests approximately $7 billion in the UK, and Canada’s La Caisse de dépôt et placement du Québec are also relaxed about the impact of Brexit, citing their long-term approach to investing and highly diversified portfolios as mitigators to this period of heightened market uncertainty.

Meanwhile, California Public Employees’ Retirement System chief investment officer Ted Eliopoulos said the pension fund doesn’t panic in volatile markets.

“We are a long-term investor; we have a $300 billion portfolio that’s built to last and to invest for 60, 70, 80 years into the future,” he said following the vote.

Lower borrowing rates coupled with weak sterling have also attracted LPs seeking direct investments; 12 percent of LPs in PEI’s survey said they would be looking for more direct investment opportunities in the UK post-Brexit.

Shenzhen-based Ping An Insurance, which bought Tower Place in London’s financial district from Deutsche Asset & Wealth Management for £327 million last year, said it plans to increase investments in UK and European listed companies.

Just a month before the vote Malaysia’s $37 billion sovereign wealth fund Khazanah Nasional launched its London office to focus on investing in technology-enabled businesses in the UK and Europe.

The Canada Pension Plan Investment Board, which owns London’s Westfield Stratford City Shopping Centre and Liberty Living’s student accommodations, also said the fallout from the vote could provide compelling opportunities, and the UK remained an attractive market for investment.