With less than seven months to go until the UK’s scheduled departure from the European Union, many private equity firms operating in Europe have given up waiting for clarity. The so-called Chequers Plan — the UK’s current proposal for the “framework agreement” on future trade that will sit alongside a negotiated Withdrawal Agreement, which, in turn, would lock in a transitional period, a (more) orderly Brexit and substantial payments by the UK to the EU budget — is under attack from all sides. Whether that plan has any hope of surviving the next few months of UK/EU negotiation in anything like its current form, and then making its way successfully through the UK Parliament, is decidedly unclear. If not, there are, of course, several other plausible outcomes, ranging from an in-principle (and vague) commitment to conclude a comprehensive free trade deal by 2021, through an agreed deferral of Brexit, to a re-run of the referendum. However, although it would be surprising if the one outcome that just about no-one wants — a cliff-edge “hard-Brexit” — were to ensue, it is still impossible to rule that out. Contingency planners must continue to assume that a disorderly Brexit is what we will get, however much they don’t expect it.
Indeed, the UK government itself confirmed over the summer that British businesses should plan for a no-deal outcome — even though the government repeated its view that such an outcome “remains unlikely” — and issued 25 papers to assist in that process. As expected, the paper on financial services provides little additional assistance to private equity fund managers. There is reassurance that “the UK authorities are ready to agree co-operation arrangements with their EU counterparts as soon as is possible” — which is hardly surprising, but doesn’t give any indication that other regulators are willing to play ball. These co-operation agreements are really the very least that is required, and even they cannot be guaranteed (although it is hoped and expected that the most important regulators will be willing and able to put them in place quickly). The UK government is also planning to allow EU27 firms to continue to operate in the UK after Brexit, and has started to publish draft legislation, but so far it is not clear what (if anything) other EU countries will put in place for UK firms.
As if planning for an event — a no-deal, cliff edge — that hardly anyone wants, and most don’t expect, isn’t dispiriting enough, planning for it before even the basic rules have been settled is a real challenge.
Clearly, not all firms will face an immediate challenge in March, and can respond to the inevitable questions from investors (and, increasingly, regulators) with at least a measure of certainty. That’s because those not currently relying on EU passports have less to worry about and are in a position to “wait and see”, although their portfolio companies may be facing challenges that could have an even greater impact on the fund. But UK firms currently marketing funds in reliance on an EU passport, or managing an EU27 fund from the UK, could have to stop, unless they have put in place an alternative solution or the EU intervenes to solve the problem.
Of course, planning for the worst does not mean that European private equity firms cannot continue to hope for the best (or, at least, something that is less bad). But it is not clear — short of no Brexit at all — what that could look like for alternative investment fund managers based in the UK. In an attempt to re-educate the European Commission about its proposals on financial services (which the British side believes were initially misunderstood by the EU’s negotiating team), the UK government issued a presentation on them last month. It is clear, however, that the UK is currently focused on principles rather than practicalities — no doubt rightly, since the EU has not yet agreed to the principle of a bespoke deal on financial services. The current outline proposals do not specifically address the practical issues for alternative investment fund managers, focusing instead on establishing a more immediate and secure third-country regime for those parts of the financial services market that currently have workable third-country frameworks in place (including investment firms regulated by MiFID II), and extending those frameworks to other key sectors. For (the few) venture capital fund managers utilizing the venture capital passport, and (the many) buyout and other alternative investment fund managers using the AIFMD passport, there is still no concrete sign that any deal will include them and — if it does — how the complexities in the currently envisaged AIFMD third country passport would be resolved to make it viable.
A Withdrawal Agreement concluded in the next six months may well give many UK-based firms some breathing space, but it seems unlikely to offer much more clarity on what their future regulatory regime will look like — at least as regards marketing funds across the European Economic Area. Clarity on that may still be years away.
Simon Witney is special counsel and Patricia Volhard is a partner at Debevoise & Plimpton.
This is part of a series, European Funds Comment, by Debevoise & Plimpton.