Senior Business Development Director, TMF Group
No Brexit herd mentality in private equity and real estate
When it comes to preparing for and dealing with life after Brexit, there’s no clearly ‘right’ path for PERE fund managers to follow.
Like so many other industries, “what impact will Brexit have on private equity and real estate?” is an impossible question to definitively answer right now.
At the time of publishing this article, the British Parliament continues to squabble over how best to exit the European Union, and PERE funds and fund managers in general have been forced to create numerous contingency plans to satisfy investors. These are live documents – updated weekly to reflect the current situation and projected outcomes from a cost and tax perspective.
The fund managers that we work with are, for the most part, holding steady. We have not witnessed significant change in approaches to PERE investment due to Brexit. But that doesn’t mean there hasn’t been tinkering to the structuring of funds, asset focus and preferred jurisdictions.
Luxembourg and Channel Islands in the spotlight
One thing we have seen is the desire for more onshore presence with a strong focus on Luxembourg. While the country is reportedly trailing Ireland as the biggest beneficiary of (an estimated 100) UK banking and finance companies, around 60 firms have branched out to – or opened an office in – Luxembourg. Among them, Private Equity firms including Blackstone, Carlyle and EQT Partners.
Investment managers are establishing Luxembourg offices as part of Brexit contingency planning so that they have a future way of looking at fund formation. And when it comes to the ideal onshore investment location, Luxembourg really is a no-brainer due to its ideal investment ecosystem. From tax advisors to legal, fund administration and servicing to regulatory oversight. Institutional investors especially like the added transparency of Luxembourg, and the disaggregation between the investment manager and reporting aspects of investments and fund activity.
The appeal of offshore jurisdictions such as the Channel Islands for raising new funds is not waning, but we have seen some unnecessary caution due to Brexit. We’ve had to highlight to managers and investors that Guernsey and Jersey, as Crown Dependencies with their own laws, lie outside of the EU and are treated as ‘third countries’ with regard to fund and business services. This means there’s no real impact for those wanting to set up for example, a Guernsey investment fund to market across Europe. To further strengthen this point for fund managers, just last month both the Guernsey and Jersey financial services regulators signed separate agreements with the UK Financial Conduct Authority. The agreements clarify that their funds will still have access to UK investors after Brexit.
No herd to follow
In terms of really preparing for and dealing with life after Brexit in PERE, there is no one ‘herd’ mentality. And this is because the future playing field remains such an unknown. The current holding pattern for fund managers can be defined in so many different ways. Some commodity-based investment managers that I talk to are saying “you know what, we’re not sticking around for this” and they’ve relocated to a jurisdiction like Luxembourg or Malta because it mitigates all their issues, and they’ve kept their UK office as a satellite office for now. Other UK investment managers don’t feel that they have a clear direction or the scalability to move as easily. They’re taking the wait-and-see approach, but making plans to ensure that they’ll continue to be able to invest in projects in continental Europe and globally, whatever the Brexit deal outcome.
Once the clouds finally begin to part and the way forward is clear, speed is going to be key. This is where working with service providers such as ourselves is a big advantage; if you need to move or bolster your domiciliation or fund formation in Luxembourg, Guernsey or Jersey we can do that. And in other key jurisdictions across the globe.
At the 2016 referendum, 59.9% of Londoners voted to remain in the European Union and that result is very reflective of the funds industry’s desired Brexit deal. Managers want ‘business as usual’ with minimal disruption as it marries with their need to forecast and plan the coming years for investment structures.
The reality for now however, is that everyone is on the back foot. But they’re poised to move forward once that much-desired clarity is received.