Brexit could boost secondaries market, says Idinvest’s Bavière

As a European fund-of-funds with exposure to the UK mid-market through the likes of Equistone, Graphite and Beechbrook, Idinvest Partners CEO Christophe Bavière is not thrilled with the outcome of the Brexit referendum. "For the moment, the most serious challenge we have to face is the uncertainty borne out of the referendum's aftermath – and that uncertainty will be with us for a while, affecting not only the UK market but the rest of Europe," he told unquote". "It is now obvious that even the most clever supporters of Brexit were not entirely prepared as to how this would play out."

Bavière's firm has had first-hand experience of this unstable environment, he says: "We were recently involved in the final steps of a secondaries deal process in the UK. This has unsurprisingly been postponed for a few days, as all parties need to take some time to breathe and digest the outcome of the referendum before proceeding further."

Despite these immediate jitters, Bavière highlights a medium-term effect that should benefit bullish LPs. "We expect that the secondaries market will eventually benefit from this situation," he says. "The nervousness of some investors with regard to the UK market should translate into portfolio reallocations, which tends to create attractive opportunities on the buy-side for the more discerning investors. So the uncertainty will cause issues with existing processes in the short-term, the medium- to long-term impact on the secondaries market should be positive."

This approach appears to resonate with others in the market, with a recent post-Brexit survey of 50 firms by placement agent Cebile Capital finding that respondents expected a wave of opportunism in the secondaries space. "Investors will access the secondaries market more to sell fund interests in UK-based GPs as market volatility, the UK outlook and the valuation of GPs with UK exposure continue to deteriorate," Cebile said in a statement commenting on the survey.

Keep the faith
Another question mark playing on the mind of European investors centres around the future regulatory status of UK-domiciled funds. Seeing as the UK is still technically part of Europe, the AIFMD still applies, meaning that UK managers can keep marketing funds under the AIFMD passport until Brexit becomes reality.

But even beyond this two-year horizon, Bavière once again remains optimistic and expects a healthy level of compromise is likely to benefit all parties: "We can't view the situation purely in black and white terms. Financial services are so central to the UK economy, and the UK so important as a financial centre for the rest of the world, that we would expect the UK to continue to have regulations, fund structures and taxation frameworks designed to favour investment."

The nervousness of some investors… should translate into portfolio reallocations, which tends to create attractive opportunities on the buy-side for the more discerning investors" – Christophe Bavière, Idinvest Parterns

More generally, Bavière is disinclined to make overly negative predictions regarding underlying dealflow opportunities in the UK and eventual returns, given the long-term nature of private equity investing and the uncertain impact of the Brexit process. "Private equity, by its very nature, is not a perfect asset class for market timing," he says. "If Idinvest's fund-of-funds was to commit to a UK GP tomorrow, that capital would be invested in three or four years – by that point the timing might be perfect to buy, and the same can hold true when that asset will eventually be divested in five to eight years."

It would seem this sentiment is shared by other European investors; according to Global Private Equity Compass, a survey by private equity platform Palico polling 106 LPs, a slim majority of European LPs (52%) don't foresee Britain's EU exit process to have a negative impact on investing. Perhaps this rather optimistic outlook is the benefit of an external view on the current British predicament. According to Palico's survey, a majority of UK-based LPs (63%) expect negative consequences for private equity in Europe.

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• IDInvest Partners (AGF Private Equity)
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