Scottish Referendum result: boon for private equity

Alice Murray
09 October 2014

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September was dominated by the Scottish referendum for independence, which brought with it an unwelcome bout of uncertainty. But, for once, it would seem the asset class has come out on top. Alice Murray reports

With the No vote winning after a week or so of narrowing margins in the polls leading up to the referendum, the hysteria caused by ambiguity has waned markedly. However, with more powers on their way from Westminster to Holyrood, a sense of the unknown still hangs over Scotland.

But looking solely at the UK private equity market, one of the most interesting effects of the referendum has been the reaction of LPs. According to several practitioners with investments based in Scotland, their LPs were notably silent in the weeks leading up to the vote. While every newspaper was bursting at the seams with commentary on Scotland's bid for independence, it is surprising that investors were not caught up in the frenzy.

The situation was reminiscent of Europe's dark days in 2010 and 2011 when the euro looked set to crumble. Back then, LPs invested in European funds were demanding contingency plans from their GPs as nervousness over the continent's stability mounted. Given LPs' reactions back then, when there was no upcoming public vote and instead centralised powerful bodies including the IMF and the ECB were pulling every lever at their disposal to bring about some level of stability, their recent calmness over Scotland seems odd.

Keep calm and carry on
Perhaps the general feeling among the LP community was that the vote would always be No. Either way, by holding back from interrogating managers over contingency plans in the wake of a Yes vote, GPs exposed to Scotland were able to take a step back and properly consider the potential impacts.

According to one private equity firm with several holdings in Scotland, there did not seem to be a huge amount of concern, whichever way the vote went. He explained that all the companies his firm had invested in are international-facing. While a question mark over currency loomed large, this was seen as something to deal with only if the Yes vote went through.

Adaptable owners
Discussing the referendum with GPs over the past few weeks has been a hugely positive experience. The key message that has shone through is the industry's determination: that it can and will handle change. One practitioner said businesses hate change as much as markets hate uncertainty, but the asset class is very adept at changing and dealing with risk.

Indeed, a company standing entirely on its own, without the support of financial backers staffed with experienced and top-quality people, would understandably be fearful of such a deep structural transformation. But for those companies nestled in private equity portfolios, the financial support of their GPs, alongside their knowledge and experience must surely be of huge comfort.

Another nod towards the benefits of private equity came through an interesting study compiled by Paul Marsh of London Business School and Scott Evans of Walbrook Economics, which isolated listed Scottish companies to assess the possibility and success of an independent Scottish stock exchange. The study found that in the event of a yes vote, it would be unlikely that Scottish companies would want to move out of London's exchange, due to its size and liquidity. In this scenario, Marsh and Evans believe there would be an equity gap left in Scotland and to fill this, the academic pair advised "encouraging a vibrant venture capital and private equity industry".

While hundreds of corporates, large and small, across the UK made their voices heard in the weeks leading up to the Scottish referendum, with many even taking the bold leap to relocate headquarters, the private equity industry stayed largely neutral and, most importantly, showed its ability to keep a cool head in times of uncertainty.