Almost exactly a year after the shock of the UK voting to leave the European Union, the British electorate delivered another surprise result: a hung parliament.
The larger majority Theresa May’s Conservative government wanted to give it a stronger footing in the Brexit negotiations has gone begging. The party lost 12 seats, leaving them eight short of an overall majority. May must now either form a coalition with one of the other political parties – most likely the Northern Irish Democratic Unionist Party, which supported Brexit – or form a minority government, which would leave the Conservatives at risk of being outvoted.
The lack of a clear outcome means continued uncertainty for the financial sector in the UK, which had high hopes of a definitive result to lend emphasis to the upcoming Brexit negotiations.
“This result obviously provides less stability and certainty than most expected,” Tim Hames, the director general of the British Private Equity and Venture Capital Association told Private Equity International.
“Private equity and venture capital does not much enjoy political turbulence (of which it has endured a lot at home and abroad of late) but has shown the ability to work around it and will do so again this time.”
Stewart Licudi, a managing director in the financial sponsors team at investment bank William Blair, told PEI that although he was hoping for a definitive outcome, the result is unlikely to affect any processes the firm currently has underway. It could, however, influence new processes.
A Conservative-DUP government, as one Nordic LP PEI spoke to pointed out, is “not vastly different” from the Conservative-Liberal Democrat coalition in power in Britain from 2010-15. In addition, the economically right-leaning DUP is likely to mean a continuation of Conservative policies on business and investment.
However, private equity insiders agree that that the result’s biggest effect is likely to be on the Brexit negotiations, with some predicting that the probability of a ‘hard’ Brexit is greatly diminished.
“A minority government negotiating Brexit via a coalition could mean that we are stepping away from the likelihood of the harshest form of Brexit,” said Sunaina Sinha, founder and managing partner of placement agent and advisory firm Cebile Capital.
“The private equity industry would hope that a favourable deal for the financial sector or regulatory equivalence would now be a real possibility to achieve in the transition and final deals.”
Ian Kelly, chief executive of fund administrator Augentius, agreed that this result presents an opportunity for the financial sector.
“A ‘hard’ Brexit certainly presents a number of potential challenges for the financial services industry as a whole,” he said in an emailed statement.
“However, a coalition or even minority government may lead to a softer negotiation, which could bring with it benefits – perhaps opening the door to allow UK domiciled funds to be passported into Europe.”
This sentiment was echoed by Hogan Lovells' global head of private equity, Tom Whelan.
“The election has resulted in a bit of a blank, but I think the Conservative party will remain in power. The result could set up for a soft Brexit, although no one knows what that will look like until there’s a deal. But I hope we’ve moved away from the hard-talking, ‘no deal’ scenario.”
The UK deals market is set for a robust year despite the added uncertainty, said Whelan.
“In terms of deal activity, in the UK at least it is a seller’s market with a cheap pound, and there’s lots of overseas money out there looking to find a home. I’m aware of lots of deals in the pipeline for the second half of this year and I get the impression that Q4 will be busy, notwithstanding the election result.”
As Debevoise & Plimpton special counsel Simon Witney points out, the two-year Brexit clock is already running and there is no way to stop it, despite the lack of information on who will be at the negotiating table.
“Whoever does the negotiating, this result clearly reduces the negotiating team’s room for manoeuvre and puts significant power back into the hands of Parliament,” Witney said in an email.
“It is hard to tell at this stage how Parliament will use that power, but we are likely to see a more open and transparent process than might otherwise have been the case – the government will have to keep MPs on side.”
Licudi noted that uncertainty, mainly around Brexit, has meant the UK market has been quieter in the first half of this year, particularly in the lower and upper mid-market, but stressed that “right now for good quality assets there are still buyers that are willing to pay”.
“I’m not convinced people will sit on their hands for two to three years while [Brexit] unfolds,” he said. “I think just knowing who and how the negotiations will be handled will give some clarity to people. At least they’ll be able to see what cards are on the table.”
– Additional reporting by Toby Mitchenall, Adam Le, Claire Wilson and Rebecca Akrofie.