The Current Status of Brexit
On 29 March 2017 the United Kingdom (UK) gave notice under Article 50 of the Treaty on the European Union that it intended to leave the European Union (EU). The UK’s departure (so-called “Brexit”) is scheduled to take effect on 29 March 2019.
The UK government and the leaders of the other 27 EU member states have subsequently approved a 585-page Withdrawal Agreement setting out the terms on which the UK will leave the EU, together with a 36-page non-legally binding Political Declaration on the proposed future arrangements between the UK and the EU. The Withdrawal Agreement contemplates a transition period – which largely maintains the status quo as between the UK and the EU – until the end of 2020.
In order to take effect the Withdrawal Agreement and Political Declaration still need to be approved by the UK parliament. The parliamentary vote was scheduled to take place on Tuesday, 11 December 2018 but has been postponed due to lack of parliamentary support for the proposed deal, and the governing party has triggered a vote of no confidence in the prime minister. It is unclear what will happen in the absence of approval – a general election, an extension or revocation of the Article 50 notice – but, absent anything else, the default remains that the UK will still exit the EU on 29 March 2019 without any arrangements in place governing the terms of its exit. This has been variously described as a "no-deal Brexit" or "cliff-edge Brexit."
It is generally accepted that a no-deal Brexit will have an immediate detrimental effect on the UK economy. The Bank of England predicts that the UK will fall into a recession, with a fall in GDP of up to 8%, an increase in unemployment of up to 7.5%, house price falls of up to 33% and currency devaluation of up to 25%.
Preparations by Private Equity Firms
Most private equity firms are well advanced in their preparations to continue fundraising and deal sourcing in the UK and EU following Brexit. Much has already been written on this topic and further details can be found here.
Preparations by Portfolio Companies
Anecdotal evidence suggests that less work has been done to prepare portfolio companies for Brexit. The Governor of the Bank of England recently warned that less than half of the UK’s businesses have contingency plans in place for a no-deal Brexit.
What should private equity firms be doing now?
Given the predicted economic risk attendant upon a no-deal Brexit and that the scheduled exit date is less than four months from now, the remainder of this note focuses on preparations for a no-deal Brexit.
Step 1: Conduct a Brexit audit of your portfolio
Do any of your portfolio companies have any nexus with the UK? Are one or more of their subsidiaries incorporated in the UK, or do they conduct business with the UK, or with suppliers or customers that are themselves reliant on the UK?
Step 2: Review current transactions for Brexit risk
Are you contemplating a transaction with a UK nexus? If so, have you diligenced and understood the Brexit risk?
For active deals that have not yet closed:-