Introduction
The UK referendum on membership of the EU took place just over one year ago (on June 23, 2016). Since then, much has been written by various commentators about the potential consequences for every conceivable industry or business sector, and private equity is no exception. However, the focus of that discussion for PE has been almost exclusively on the funds/investment management side of the PE equation (perhaps because there is a greater perceived risk for, and undoubtedly greater uncertainty about, that aspect). For recent Dechert briefings and advice on this topic, see here and here.
Relatively little has been written about the other side of PE activity: the potential impact on the investment of those funds in portfolio companies and, equally importantly, on the exit from those portfolio investments. This article looks at the exit: in particular, whether and, if so, how the UK's decision to leave the EU might affect the process, timing or choice of exit route. Typically, a PE exit involves a decision to proceed with either a sale (whether secondary or trade) or an IPO, and each of these is considered below.
The unhelpful, but painfully true, position (as with many discussions on Brexit topics) is one of uncertainty. Nobody knows what the position will be on March 30, 2019 – at least for now. However, there should be and remains a meaningful degree of confidence and optimism when considering private and public M&A. It is difficult to envisage material changes in law or practice as a result of Brexit, although business confidence and sentiment will be key factors. But there are undoubtedly important steps which PE funds, and their portfolio companies, can and should be taking now to ensure that the exit is not affected by Brexit (whether the exit is before or after the UK leaves the EU).
The Sale Route
In summary, no need for immediate concern, but watch this space.
Many of the points above are already being seen in practice. The Dechert team has standard language which seeks to address the different issues raised above (whether for DD questions or for the transaction documents), as well as experience of multiple recent negotiations on the points.
The IPO Route
The PE exit plan will often start with a dual track process, assessing the relative merits of the sale versus the IPO; weighing up price, certainty of execution, and access to liquidity. As the Brexit negotiations start in earnest, might Brexit-related market uncertainty mean that the certainty offered by the sale route becomes all the more compelling for the PE seller?
The impact of the referendum decision?
There is no doubt that appetite in London for IPOs slowed down in the run-up to the Brexit referendum; uncertainty and volatility are the enemies of IPOs. Uncertainty over Brexit cast a shadow in 2016 — according to Dealogic, just under US$7 billion was raised in IPOs in London compared with US$17.2 billion in 2015.
What about now though?
Whilst it may be true that compared with some of London's rivals there has been a sluggish start to 2017 (although there have been recent signs of activity building), it is generally accepted that the UK's invocation of Article 50 of the Treaty on European Union on March 29, 2017 (which was the action which formally began the United Kingdom's withdrawal from the EU) of itself has not had any direct impact on companies’ decision making when looking at whether to proceed with an IPO, but how the process unfolds will be closely watched.
There is no question that the impact of the political overhang can make investors cautious (particularly if the company in question may be affected by any of the "EU Specific" issues raised above); however, most commentators are comfortable investors will still invest for the right equity story. The London Stock Exchange insists that London’s “natural strengths” will outweigh any uncertainty generated by the Brexit negotiations.
In fact, at the moment, the weakening of sterling (in large part Brexit-driven) may have more of an effect on dampening the IPO market, with increased appetite for UK assets being shown from overseas buyers; and with more private capital available to support these companies, they can continue their growth without any additional scrutiny and costs of being a public company.
Whilst some may fear that Brexit will make a post-EU London less attractive to PE-backed IPO candidates and investors, others perceive a possibility of achieving the best of both worlds, with London retaining its gold plated status as a premier global finance venue with the added flexibility around the edges once it’s no longer subject to EU rules. We shall see.