What Brexit means for secondaries

Britain’s vote to leave the EU will bring dislocation and a short-term slowdown in the market.

The result of yesterday’s referendum was not what the private equity industry wanted: three out of four professionals were in favour of the UK staying in, according to a poll by sister publication Private Equity International in March, and more than two-thirds of UK-based GPs felt their businesses would be worse off if Britain voted to leave.

It was clear in the lead-up to the referendum that secondaries market participants were concerned about what a possible Brexit would mean for the sector, with the managing partner of one London boutique buyer telling Secondaries Investor that he would consider relocating his firm to a European capital should the UK vote to leave, because deal-making would be easier.

Global secondaries buyers also voiced concern about volatility, with many agreeing that uncertainty on both the buy- and sell-side was bad for business.

Early market reaction suggests those participants were right to be concerned. At one point this morning, the pound was down more than 10 percent against the dollar, at a low not seen since 1985.

The result has implications for EU nationals working in Britain, who will no longer have the automatic right to do so. This is particularly pertinent to an industry for which London is a European hub – the UK offices of European and global secondaries firms are home to many different nationalities, with the managing director of a global advisory firm telling Secondaries Investor earlier this year that he was concerned for the fate of the EU nationals who make up half his staff.

While we don’t have a crystal ball to predict what Brexit’s impact will be on secondaries, here are three issues market sources pointed to earlier today:

1 Current deals in play may die

With so much uncertainty surrounding the economic implications of Brexit, buyers will hold off on closing any deals currently underway until there’s a clearer picture of the consequences.

2 In time, dealflow will bounce back with force

After the dust settles, LPs will likely want to make adjustments to their portfolios in light of the new landscape, similar to what happened in the secondaries market several years after the 2008 collapse of Lehman Brothers. This could result in the sale of discounted sterling-denominated assets or the sale of Europe-focused assets by foreign LPs wary of long-term prospects for the continent.

3 Regulatory uncertainty is a big concern

One London-based advisor said he wasn’t even sure if his firm would be able to advise European clients in the future: “Will we be able to continue to operate as advisors for continental-based funds? Who knows?”

How else will Brexit affect secondaries deals? Get in touch: adam.l@peimedia.com