Group

Loud and Clear – February 2020

We need to talk about Brexit – a framework for what to tell your LPs

 

We’ve been through three prime ministers, two general elections and suffered three and a half years of uncertainty but, on 31 January, the UK actually did cut ties with the European Union. The UK has now entered the transitional period, which is planned to conclude on 31st December. Everything so far has gone “according to plan”, right? Although the terms of the departure have been agreed, the future relationship between the UK and the EU will still need ironing out. We have a year to do that – that’s about 30% of the time it has taken to agree that it would happen, in the first place. What could possibly go wrong?

In any case, after an uncertain three+ years, Brexit has been delivered (the “while you were out” card says it’s in your designated safe place: behind the wheelie bin).

So, now we have (at the second time of asking) a new 50 pence piece and different coloured passports. Until the end of the transitional period is reached (which will absolutely, definitely, unquestionably, certainly, without doubt be at the end of the year), there may not be much of a change. Up until 31 December, EU law will continue as it has been, in the UK. The UK will still be able to participate in the single market, regulation won’t change, and financial passports will still be valid. And don’t worry, your English sheepdog will still be able to travel safely on its EU passport. Woof!

So what will the UK/EU agreement look like? And what does this mean for the economy and private equity?

Well, all things remain uncertain (there’s that word again). But uncertainty is not your friend if you are 80% invested and want to raise your next fund. LPs want certainty.

Some aspects of Brexit will be front of mind for LPs:

  • Can they invest in your fund?
  • Will you be able to continue the same investment strategy and at what financial cost?
  • How will the portfolio be affected?

The answers to these questions are subject to so many variables, that it is important to take professional advice (my advice is to speak to Mike Booth, our regulation expert, and Daniel Lewin, our head of tax). Clearly, the nature of the deal agreed between the UK and the EU (assuming there is one!) may have a significant impact on your strategy. But you cannot wait until 2021 to act.

Yes – this means you have homework to do…

First of all, you need to understand how, if at all, you might be better structured and declare any changes to your LPs. Secondly, you need to evaluate and explain any proposed changes to your investment strategy. Then you will need to explain the level of impact you expect Brexit to have on your portfolio.

Unpacking these issues, there are a number of topics that need to be thought through (with the support of professional advice, of course). Clearly, it would be better to amend a structure than change investment strategy (e.g. to avoid potential complications of investing from the UK into France, one would typically prefer to amend a structure in order to be able to invest out of e.g. Luxembourg, rather than to stop investing in France). In any case, a number of the more important questions to consider, are below:

Structure and locations

  1. Where is each element of your structure located?
  2. From a logistical perspective, how easy would it be to move each element to another locations, were this deemed necessary?
  3. What percentage of your investors, by number and by share in the fund, are located:
    a. In the UK
    b. Outside the UK, but in the EU
    c. Elsewhere
  4. For your larger investors, where else do they have structures from which they can invest?

Investment strategy

  1. Which jurisdictions are you currently investing into?
  2. How does your pipeline break down, by stage?
    a. UK based companies
    b. EU based companies
    c. Companies based outside of UK and EU
  3. How are your exit opportunities affected?
    a. Location of potential secondary buyouts
    b. Location of trade buyers

Portfolio impact

  1. Where are your current portfolio companies located?
  2. Where are the key constituents of their supply chain located?
  3. Where do they tend to recruit from?
  4. Where are their customers based?
  5. How might their business partners be affected by Brexit?

Once you have the answers to these questions, you can start to formulate a plan – what needs to change, what can stay the same and where are any potential impacts on performance likely to be felt.

It is important to document the decisions you have made and make this available to your team members, so that they are prepared for any questions from your investors and other stakeholders. You should communicate a summary of your findings to your investor base and you should include a section on Brexit, if it impacts you, in your next PPM.

Whilst the road ahead is, indeed, uncertain, at least now you will have a map!


For more information on how MJ Hudson can help you, please contact Matthew Craig-Greene using the contact details below.