Article 50 ushers in era of uncertainty

The UK formally started the process of exiting the EU on Wednesday, triggering Article 50 of the Lisbon Treaty and firing the starting gun on a two-year period of exit negotiations.

Fundraising data suggest that the vote has as yet had no adverse effect on UK firms’ ability to attract capital. However, this could change in the medium term.
It is unclear whether the two-year negotiation period will result in UK-based firms having access to EU markets through the passporting regime.

“While triggering Article 50 does not in itself change anything for UK fund managers, those that currently have UK-based AIFMs and AIFs should be doing some contingency planning if they wish to be sure they can rely on AIFMD passporting to market future funds once Brexit has actually taken place,” said Piers Warburton, an investment funds partner at law firm Ashurst.

Some market participants were more optimistic. “I can’t imagine the UK not being given the same third party passporting rights as other European nations,” said Steve Georgala, chief executive of fund administrator Maitland. “The UK market is the most sophisticated and regulated jurisdiction in the EU. There is too much vested interest from both sides and people want to invest in the UK.”

Another fund administrator, Augentius, played down Brexit’s effect. “While UK managers may need to create slightly more complex multi-jurisdictional structures to accommodate the change, for example we could see dual-streamed products containing both EU and non-EU fund structures for different investors, the fundamentals remain unchanged,” read a statement from the firm.

InvestEurope, the industry body for the European private equity industry, warned that managers should brace themselves for a “hard” Brexit. “The Brexit negotiations will be unprecedented in their complexity and even if all the issues cannot be settled in two years, an extension of the talks or a transitional deal is far from guaranteed,” said chief executive Michael Collins. “We advise all our members to consider the consequences for their activities of a UK exit from the EU in March 2019 without a deal on the future relationship.”

A glance at private equity fundraising data shows that the nine months since the referendum has been encouraging for those raising UK-focused private equity capital. Between June 2016, the month of the vote, and March 2017, £6.7 billion ($8.3 billion; €7.7 billion) was raised for sterling-denominated funds, according to PEI data. This was almost twice as much as the £3.6 billion that was raised in the corresponding time period in the previous year.

Among the firms to raise capital since the referendum are HgCapital, which collected more than £3 billion across two separate funds, Mayfair Equity Partners, which raised its £400 million debut fund, and Livingbridge, which raised its largest fund ever at £660 million.

“During fundraising last year we did have some nervous investors ahead of the first close in July,” said one London-based general partner in response to a survey by Private Equity International, “but all expected investors came in for the final close of the fund.”

More than half of general partners surveyed who had raised capital since June said the vote had not affected their effots. None said it had sped up their marketing efforts.