Brexit brings a review, but unlikely to bring long-term negatives to UK funds market

17 Apr 2018

With the timing of the Transitional deal agreed, Richard Hansford, Ocorian’s Director for Alternative Investments, says the UK funds market is still open for business.

Let me start with the essential caveat: Only granular analysis of each asset class will determine the exposure and relevant impact of Brexit. Now that’s out of the way, let’s get real.

Brexit will have an impact on the attractiveness of the UK as an investment destination, currently only bettered by the US globally. It is anticipated that over the next two to three years the UK will drop from second place to sixth in the Venture Capital and Private Equity Country Attractive Index, an annual ranking from the IESE Business School which uses six defined criteria to rank countries, including economic activity, depth of capital markets, taxation, investor protections and corporate governance, human and social environment, and entrepreneurial culture and deal opportunities.

So yes, there will be increased competition, and the UK’s slice of the pie will be smaller. It’s expected Japan, Hong Kong, Singapore and Canada will all leapfrog the UK in terms of investment attractiveness. Interestingly, no EU country is expected to overtake the UK, though The Netherlands, Ireland, Germany and France are expected to close the current gap.

Does that mean a collapse in the UK market is imminent? In a word: no. Recent research found investors are less affected by Brexit than first feared; although 17% of fund investors outside the UK said they felt the UK was less attractive now, an identical percentage found either the markets had performed better than expected or that the referendum had even proven a shot in the arm for the UK market.

Although the general sentiment is that Brexit will have a negative impact on the UK asset management industry, deeper analysis shows a stronger impulse for investors to allocate between specific asset classes rather than specific regions. And so we get back to that need for granular analysis of each asset class to determine the exposure and relevant impact of Brexit.

Private equity has been on an upward trend for a while with companies trading at multiples not seen before, particularly in certain markets and countries. Does this mean we are entering a period of reflection? The data doesn’t think so as there are a record number of funds looking to raise capital. Yet some reports do support the notion that limited partners (LPs) are committing more capital to established managers with proven strategies, making it difficult for new managers to raise capital in a crowded market place.

There are high levels of dry powder, too, reflected in the number of funds in the market. With the EU economy moving in the right direction, coupled with the first interest rate hike in the UK for a decade, we expect more interest rate movements in the coming years. This, in turn, will increase the cost of financing for firms and may have an impact on the values of real estate and private equity assets.

The impact of Brexit is driven by policy changes reducing or eliminating UK-based managers and funds from marketing across the EU and attracting EU capital. If there is unfavourable policy coupled with regulatory and tax changes in the UK, the private equity and real estate industry will simply move. However, despite all the scaremongering of an anticipated mass exodus from The City to EU cities such as Paris, Frankfurt and Luxembourg, the reality is far from that, and London remains strong. Whilst there will be some movement, in particular at UK investment banks, post-Brexit, it will not be widespread. The multicultural and multilingual diversity of London is what attracts people to it - the shops, food, culture and so on - and people will not be willing to leave all that behind.

However, private equity and real estate remains - and will continue to remain - very important to the industry. In the long term, the general consensus is that Brexit will have little if any impact on the private equity and real estate industry, but it does remain to be seen. As it stands, all Brexit has done is cause some managers to review their existing operating models and investment strategies.

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