Brexit special: The right political fit for private equity

Switzerland model
This model would see Britain apply to join the European Free Trade Association and then negotiate bilateral agreements with the EU over access to the single market. Although Switzerland has more than 120 agreements in place, none of these allow it full access to the EU’s internal market for financial services.

If the UK was to choose the Swiss model it would not have any AIFMD rights and GPs would be required to market into European countries using National Private Placement Regimes. 

“The EU has labelled this model complex and flawed, making it less likely that it would agree to a similar approach in the event of a Brexit,” Debevoise said in its spring private equity report. 

Norway model
If Britain follows Norway and becomes a member of the European Economic Area, fund managers would continue as usual post-Brexit. As an EEA member Norway has access to the single market, paying a contribution to the EU budget in return. The UK would have little or no influence on EU laws affecting the industry, despite having to abide by them.

Access to the Alternative Investment Fund Managers Directive marketing passport makes this option the most attractive for GPs, says Paul Lawrence, head of European funds at Elian: “However, it is the worst from a political standpoint because Norway still abides by the EU free movement laws and pays contributions to the EU budget. Therefore, it may prove difficult to get accepted.”

Canada model
Canada and the EU have a free trade agreement designed for trade in goods. However, it does not offer full access for services. They have also been working on a Comprehensive Economic and Trade Agreement for a number of years, but it is not yet in force.

A CETA-type deal would not give UK financial services firms the EU market access that it has now, but would include liberalisation of trade in services and measures to protect foreign investors.

“The upshot is that this would leave fund and asset managers with no passport rights, defaulting to the ‘full scale divorce’ scenario,” says one London-based private funds lawyer.

World Trade Organisation rules
If Britain was to adopt World Trade Organisation rules, it would be able to trade with the EU solely on the basis of being a WTO member. However, this model is the furthest from the current EU-UK relationship and does not cover services. Under this arrangement EU law would no longer apply in the UK. However it would lose the associated benefits of the internal market.

“Existing WTO rules have not kept pace with the dynamic nature of today’s financial services world,” says John Forrest, head of international trade, DLA Piper. “Therefore, any model based on WTO rules would not be fit for fund managers that want to undertake fund related activity on a cross-border basis.”

Full-scale divorce
If Britain decides to cut all ties with the EU and not agree any exit or grandfathering arrangements with the bloc as a whole or individual members, UK GPs will no longer be able to market to EU investors under an AIFMD passport and would become “third country” managers. Managers would be required to notify each member state regulator and comply with those member states’ local rules under their NPPRs.

“Larger managers with both a UK fund range and a Luxembourg or Irish fund range are better positioned to bear a loss of passporting rights. Smaller managers with a mixed UK/EU client base are generally more dependent on passport rights and so face more risk,” says Tamara Cizeika, regulatory lawyer at Allen & Overy.