The UK’s vote to leave the EU has not been well-received in the City of London. Investment banking deals are likely to slow down, trading and operations jobs could be on the way to Frankfurt, Dublin or Paris and fund managers may also shift some jobs away. But, for private equity, Brexit could offer some opportunities. Here’s why.
Just last week, two major private equity houses closed multi-billion-pound funds to invest in European businesses despite concerns that the region is in flux over Brexit. Cinven closed its biggest-ever £5.8bn fund, while Ardian raised £830m for European buy-outs.
Investment banks in Europe continue to see falling year-on-year revenues, and Brexit is likely to add to this. Private equity, in truth, already has the pick of Millennials coming out of banking, and now many more will not want to hang around on the sell-side to see how Brexit plays out. Private equity pays more, and buy-side firms are not weighed down with cross- jurisdictional regulatory burdens and can just get on with business.
Forget for a moment all the noises about large companies moving out of the UK after Brexit and remember that there is no better city in Europe to do business than London. No other city even comes close. It takes 10 minutes and costs £15 to incorporate a company. There are more lawyers and accountants in London than in any other European city. London has the highest number of start-up businesses. UK offers one of the most favourable tax regimes of any developed nation. Most importantly, UK has the world’s best universities that offer top talent for companies across every sector.
With the USDGBP trading at a 10% discount from January 2016 levels, and 15% discount from 2015 highs, there are immediate and significant saving for non-UK investors buying into GBP assets. If mean reversion has any meaning, then there is no better trade than to buy GBP and to buy it now.
With an absolute minimum of two years for exit negotiations (some suggesting four to six years as a more likely timeframe), the very earliest point at which we will see a change in the UK’s status is in the summer of 2018. The reality is that investors around the world are still keen to invest in UK private equity managers, diversifying their portfolios across both geographies and asset classes. Yes, UK managers may need to create slightly more complex multi-jurisdictional structures to accommodate the change, but the fundamentals will remain in place.
According to Colliers, there is still a domestic housing shortfall of circa 150,000 new homes a year in London. The £300,000 to £1,000,000 market still has demand outstripping supply, which is continuing to drive residential pricing. Since the announcement of the referendum outcome on 24 June, the strongest investment avenues of Asia (in particular China, Hong Kong and Singapore) and the Middle East (UAE, Qatar and Saudi Arabia) have already begun to take advantage of the weak pound by inquiring about London residential assets.
Sectors such as healthcare will stay stronger than ever. Private hospitals, dental practices, nursing homes and care homes are generally not correlated with the economy, and in certain cases even recession-proof. People still need doctors and dentists, and the ageing population is not going anywhere. In the UK, 1 in 6 people (16.4%) are over-65; this will increase to 1 in 4 (25%) by 2050. The number of over-85s will almost double by 2030.
Sameer Rizvi, CFA is the Managing Partner of RD Capital Partners LLP, an investment management and advisory firm that invests into European healthcare, real estate and technology companies. He has previously worked as an investment banker at the Royal Bank of Scotland and at Commerzbank.
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