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The Brexit effect: are LPs avoiding the UK as chaos continues?

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The ongoing Brexit uncertainty has already seen big businesses eschewing the UK for alternative bases – and private equity fund investment could be in line to suffer too.

Some investors are understandably eyeing the UK with caution as the messy exit from the European Union continues to unfold, with the partner of one family office telling AltAssets they sold up their UK-based assets in the runup to Brexit and are holding back on further commitments to the country.

The partner, who didn’t wish to be named due to the confidential nature of their business, also highlighted concerns about the ballooning nature of private equity fundraises, which has given them pause about committing to firms upping the sizes of their vehicles.

Within the notoriously opaque world of private equity, private and family office seldom discuss their investments, so it is a rare occasion that an investor would take the time to comment on the market, let alone on Brexit.

Despite two years of negotiations and preparations the UK’s relations with Europe and business prospects remain persistently uncertain.

The UK’s Office for Budget Responsibility recently reported that it expects the UK’s economy will struggle to achieve anything more than 1.2 per cent this year.

It also predicted the housing market – a key metric for economic performance – will see prices decline for the first time since the 2008 financial crisis.

Meanwhile, the Institute of Directors warned last month that nearly one in three (29 per cent) UK businesses could be forced to shift operations abroad due to Brexit, according to the results of its own survey.

The private office AltAssets spoke to said it is not avoiding the UK, but had decided not to make new investments or fund commitments in the country at this point in time.

“We would not like to make an investment today and then one month later there is a crisis in the UK,” they added.

“At the moment we are not making any new investments [in the UK] until we know how this will play out.”

Very few of the senior executives at LPs and GPs that AltAssets has interviewed of late have been willing to comment on the Brexit or how it has affected their investments.

But it is perhaps unsurprising to learn that some LPs may be having reservations about investment into UK private equity.

“When the Brexit vote came then the market bounced. After that we sold a few investments in the UK,” the partner said, when discussing their current allocation to the UK markets.

“They were normal exits, and we also sold a few fund commitments one and a half years ago.”

The private office was emphatic that though they are comfortable with their current exposure to the UK, they may still consider investing should the right opportunity arise.

There is evidence to show that Brexit may have impacted transaction volumes in the country, with PE activity in the UK from EU-based investors falling from 113 deals worth €22bn in 2015 to 89 valued at €10bn in 2016 according to Pitchbook data.

There was a massive jump in the number of deals to 118 in 2017, representing a record of close to €28bn, however the declining trend continued last year to €14bn worth of deals.

While some investors may be wary of the UK’s future prospects, others are seeing a chance to capitalise on any shrinking valuations post-Brexit. Almost half of LPs see opportunities in buying UK-based assets cheaply post-Brexit, according to the latest Coller Capital Global PE Barometer.

More so, just five per cent of LPs believe Brexit will have an overall positive impact on European PE. Those figures were compounded by two fifths (40 per cent) of respondents seeing Brexit as having a harmful influence on European private equity returns.

In relation to fund raising more generally, the family office partner echoed familiar sentiments that fund sizes are getting too big and the terms associated with them are becoming unattractive for LP investors.

Despite this, they have seen some big LPs accepting paltry returns for illiquid private investments at the moment. “There are big investors that are seemingly committed to that type of investment, so they must find it interesting,” they added.

“I could tell you a lot of examples where we have walked away from fund investments where the LPA (Limited Partner Agreement) terms have been unacceptable, but the big investors are continuing to commit and this is why the GPs can get away with it.”

The partner also explained that EU regulations have created friction in access to US-based fund managers.

“It’s clear that AIFMD had an impact that really good funds in the US, they don’t come to the European market.”

“So the regulator achieved that the best opportunities are not marketed to European investors and that means that we have to do our work to get access to those investments.”

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