UK private equity anxiety as Brexit crisis intensifies

Kenny Wastell
26 March 2019

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The past month has seen unprecedented developments in UK politics, though the escalating uncertainty is bringing indicators of concern in the private equity market. Kenny Wastell reports

"It's madness," said Enterprise Investment Scheme Association director general Mark Browridge, shortly after members of parliament voted again to reject the Brexit withdrawal conditions laid out by Theresa May's government. "What SMEs want is certainty. Uncertainty breeds fear and that is what we will see more of with the agreement not passing the House of Commons. How can any business [effectively] plan with the political backdrop we are currently experiencing?"

Even by recent standards, March 2019 has been a tempestuous month in UK politics. After MPs voted by an emphatic majority to reject the withdrawal agreement for a second time, they then voted to reject a "no deal" outcome, to seek an extension to the Article 50 notification period and, last night, to take control of parliamentary proceedings in order to seek a consensus around a plan B. The EU has granted an extension until 22 May, subject to the deal being passed this week. Failing that, the bloc granted a shorter extension until 12 April, during which time the UK would have to decide what approach to take.

This remains a period of incredible uncertainty for businesses across the UK" – Andrew Ferguson, Baird Capital

The UK could seek a longer extension in order to secure changes to the political declaration that accompanies the withdrawal agreement, or to hold a democratic event such as a ratifying referendum or general election. Such an approach would require British participation in European parliamentary elections to ensure the legitimacy of the EU parliament. Alternatively, the UK could crash out of the EU without a deal – in defiance of parliament's earlier vote – or possibly pass May's deal at the 11th hour. However, many commentators argue there would be insufficient time for the country to pass the required legislation, should it opt to endorse the deal once the 22 May extension is no longer available.

"This remains a period of incredible uncertainty for businesses across the UK, with questions around supply chains, regulatory permissions, access to talent, impact on foreign exchange and margins, and the possibility of tariffs," says Andrew Ferguson, managing director at Baird Capital. "Nevertheless, mid-market growth companies can be more resilient and nimble during times of uncertainty, diversifying into new markets and services. Internationally focused businesses that export high-value products and services overseas and into high-growth markets beyond the EU may be less affected by Brexit."

Troubling times
Despite this, the UK mid-market is on course to have its quietest Q1 in terms of buyout activity since the financial crisis, according to Unquote Data. The 11 buyouts in the £50-500m range since the start of 2019 is a significant drop on the 23 and 17 seen in the same quarters of 2017 and 2018 respectively. However, this drop pales in comparison with the collapse in activity witnessed in 2009 and it is clear that some practitioners are still confident of deploying capital in the country.

"The diverse strategies encompassed within private equity mean that each firm is likely to be impacted differently by Brexit," says Tristan Nagler, UK managing director of Aurelius Equity Opportunities. "We see the current climate as one of opportunity rather than threat. Brexit has created a challenging environment for many companies, and management teams are increasingly reacting to underperformance by reviewing their portfolios and deciding to divest of non-core or struggling divisions, in order to strengthen their operations. As an operationally focused special situations investor, these divested assets present some compelling investment opportunities."

Most people will agree that the UK has now reached a decisive moment in Brexit negotiations. The steps taken by the country's government and parliament in the coming weeks will have transformative ramifications not just for the UK's private equity market, but for its economy and society as a whole.

It is this that led to the unprecedented release of a joint statement by the Confederation of British Industry and the Trades Union Congress urging prime minister May to develop a plan B should the current agreement fail once and for all. "Together we represent millions of workers and tens of thousands of businesses," the statement began. "It is on their behalf that we are writing to you to ask you to change your Brexit approach." Parliament now has the opportunity to do exactly that.