UK-based private equity firms seeking to raise capital for their funds should prepare for tough questions from investors on the potential impact of Brexit on their businesses, lawyers say.
“Managers should expect investors to verbally ask them about Brexit and need to get their stories straight,” said Nicholas Holman, co-head of Hogan Lovells’s investment funds practice.
There were seven dedicated secondaries funds in market managed by UK-based firms seeking around $2.9 billion in total as of 30 August, according to PEI data.
Here are three Brexit considerations for fundraising GPs.
1. Where would you move your fund if the need arises?
Though the UK government has not yet begun Brexit negotiations, “[GPs] should be able to tell investors that they have analysed the implications of Brexit and have worked out…where they would or would not be likely to move the fund,” said Holman.
Managers who want the flexibility to move a UK fund should consider adding this to their LP agreement, said Eamon Devlin, managing partner at MJ Hudson.
“If a manager is about to start fundraising for an onshore UK fund, then it is sensible for them to consider having a mechanic in the fund documentation that allows them, during the life of the partnership, to relocate the fund to a different jurisdiction if that is what the manager thinks is in the best interests of the overall fund and its LPs,” Devlin said.
At present, “we have not seen wholesale amendments to existing documents”, Devlin said. “However, we have seen managers that are starting to raise a fund looking at what the ‘right’ jurisdiction should be for that fund. It is clear that England and Scotland has become a less obvious choice than it was before the Brexit vote.”
2. How would you ensure LP approval to move the fund?
When considering where to move the fund, managers should consider the tax and regulatory implications, which may influence whether or not investors decide to make an investment, said Hogan Lovells’s Holman.
“A clause stating that the fund can only be moved with a 75 percent vote in favour by investors may be seen as more favourable,” Holman said.
3. How should you refer to Brexit in a Private Placement Memorandum?
Fund managers have been seeking legal advice on whether and how they should refer to Brexit in the Private Placement Memorandum, a disclosure document sent to potential investors during a capital raising by a private equity fund.
“Managers in the middle of fundraising should ask themselves if there has been a material impact from Brexit on the fund and consider carefully whether they need to mention it in the PPM,” said Holman. “In many PPMs, a political or regulatory change that could have an impact on the fund has already been disclosed as a risk factor.”
For managers who decide that it is prudent to refer to Brexit in the PPM, MJ Hudson suggests addressing the following key points: the potential impact of Brexit on the UK or EU portfolio, and to what extent Brexit is likely to affect the fund’s investment strategy; whether the investment strategy needs amending, broadening or narrowing as a result; any additional risk factors; and the impact on target returns.