The UK formally started the process of exiting the EU on Wednesday, triggering Article 50 of the Lisbon Treaty and firing the starting gun on two years of exit negotiations.
In a survey by sister publication Private Equity International this week, most limited partners who responded said they hadn’t considered selling or sold any stakes in UK or Europe-focused funds as a result of the Brexit vote.
That LPs haven’t yet flooded the market with stakes in such funds is unsurprising. It is still early days – as late as eight weeks before Wednesday’s official letter was delivered to Brussels, UK politicians were voting on whether to back the government’s bill to leave the EU, and just two months prior Britain’s highest court was still mulling over whether the government could even invoke Article 50 without parliament’s support.
“The entire market, whether it’s secondaries or private equity in general, has taken a wait-and-see approach on Brexit,” Sunaina Sinha, managing partner at London-based advisory firm Cebile Capital, tells Secondaries Investor. Pricing on stakes in UK buyout funds remains in the 90s as a percentage of net asset value and has done for the last nine months, she says.
LPs are far from worried. Indeed, if primary fundraising data are anything to go by, LP appetite for UK-focused private equity has remained very buoyant. Between June 2016, the month of the vote, and March 2017, £6.7 billion ($8.3 billion; €7.7 billion) was raised for sterling-denominated funds, according to PEI data. This was almost twice the £3.6 billion raised in the corresponding period of the previous year.
One aspect of the Brexit aftermath has been a boon for secondaries: the devaluation of the pound, which lost almost 20 percent in value against the US dollar at one point after the referendum. Firms have been taking advantage of currency fluctuations to execute take-overs of London-listed private equity vehicles, including HarbourVest Partners’ unsolicited bid for SVG Capital in September and Kline Hill Partners’ acquisition of listed fund of funds Private Equity Investor.
Wednesday’s official trigger has made the process a little clearer – “it’s now a reality,” said one London-based market participant – but uncertainty still surrounds exactly how the UK will exit the EU. Indeed, InvestEurope, the industry body for European private equity, warned this week that negotiations will be “unprecedented in their complexity” and that it may take longer than two years to settle all the issues related to the divorce. The group has told members to consider what will happen to them if the UK crashes out of the union with no deal in place.
Some secondaries buyers are hoping this lack of clarity will spur dealflow. Uncertainty is “good from a secondaries dealflow perspective”, as HarbourVest Partners managing director David Atterbury said at a roundtable in February.
The secondaries market has at least two years, if not more, to see if this thesis holds true.