By David Fowler, Global Co-Head of Product at Apex Group

The UK’s vote to leave the EU seven years ago on June 23 2016 sparked a period of political uncertainty and volatility that, it could be argued, is still playing out today. While a deal was reached with the EU after much parliamentary wrangling, questions still remain for many about how that deal will impact the UK economy and financial services industry.

And, with Labour likely headed for Downing Street after 13 years of Conservative government - possibly with the support of the Liberal Democrats - we may find the current settlement between the EU and the UK being looked at once again.

Beyond politics, Brexit also caused an economic shock. In the immediate aftermath of the vote business confidence wobbled significantly. Analysis of the subsequent long-term data however, reveals that the impact on overall business investment wasn’t as dramatic as some feared. Likewise, merger and acquisition activity following the vote to leave the EU, despite fears of a substantial drop in deal making, weathered the uncertainty well, and especially since the EU and the UK finalised a trading deal, there has been little meaningful impact on M&A activity. 

The Office for Budget Responsibility too confirms that, while economic growth in the UK has lagged slightly behind the EU average since the referendum, the effect hasn’t been as pronounced as initially thought.

While the worst predictions of Brexit fallout haven’t materialised however, uncertainty remains and the future could yet see a Brexit impact on the UK’s private equity industry.

A tale of two cities

For years Paris and London have dominated the race to be Europe’s de-facto financial hub and, until recent years, there was little doubt that London was ahead. This however could be starting to shift as the long-term reality of Brexit bites. Recent research suggests that, for example, the combined value of the French stock market has surpassed that of London.

Should Paris establish itself as Europe’s primary finance hub, then that would have downstream effects on PE deal-making and fundraising in the UK. As it stands however, the UK remains the largest PE market beyond the US and grew approximately 18% between 2017 and 2022. The initial Brexit decision shocked the market and caused a temporary fall in the value of UK businesses leading to some global managers picking up assets at very favourable valuations, this also translated into the public space where there was an increase in public to private transactions.

Thus far however, private equity in the UK has remained bullish with the number of European corporates acquired by UK private equity having risen from 245 in 2020 to 442 in 2021.

Coinciding with Paris’ nipping at the heels of London, last year saw a significant decline in UK deal-making, according to PwC. The UK saw 4,232 deals across 2022, compared to 5,033 for the previous year, a 16% decline. Observers will note that this decline was consistent with global patterns and therefore doesn’t say anything unique about the post-Brexit economy. Rather it instead reflects the ongoing uncertainty and high interest rates persistent across developed economies.

Nevertheless, it does call for a degree of caution when we look forward to next year, and the next seven years as Britain continues to chart a course outside the EU (assuming nothing happens to the contrary). Beyond Paris, Luxembourg too has become a domicile of choice for managers looking to set up funds to be marketed into the EU.

Luxembourg has created vehicles for the alternatives market such as RAIF and ScsP which has made it a natural choice for PE managers looking to market into Europe. The workforce is multilingual and mostly English speaking and a number of managers already had bases there. Ireland has a similarly skilled workforce and has recently launched the ILP (Irish Limited Partnership) to attract US and UK managers looking to market to the EU, but it will take time for this to reach the levels of investor familiarity which Luxembourg benefits from. 

We have therefore seen a significant uptick in demand from PE managers for third party service partners who are present in all major European financial centers but yet are jurisdiction agnostic – able to advise and provide local support on the establishment, launch and marketing of funds in whichever domicile best suits their needs.

Looking to the future

Seven years on from the Brexit vote, from a regulatory standpoint UK managers have now adapted to being a third country from an EU perspective and have utilised the NPPR or in many cases used third party AIFM platforms in Lux and Ireland to market their funds in the EU. The next seven years though, assuming no seismic changes in EU/UK relations, will be less volatile and, with a period of adaptation now behind us, could see further growth for UK PE.

UK PE managers continue to complete deals in the UK, EU and globally and the advent of structures such as the UK LTAF, will encourage more UK pension allocations to PE. UK managers have a playbook to market into the EU, and although this will be more costly and time consuming than it was pre-Brexit, the mechanism and structuring has become familiar to both managers and investors.

The next seven years will partly be defined by government policy and regulation. Increases in the rate of corporate tax and no signs of any de-regulation have resulted in questions over the competitiveness of the UK market and its ability to attract new managers. The UK remains attractive to managers as a hub due to the capital available, the Common Law legal system and the knowledge and expertise within the market. With other European hubs keen to capitalise on any opportunities to take market share however, there’s no room for complacency, and the UK Government should maintain an environment that is attractive to both managers and talent.