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What does that mean?
Could Brexit mean lighter regulation for private equity?
Emma Danks from Taylor Wessing assesses whether the ability of UK-based fund managers to operate across the European region could be impaired if access to the single market and freedom of movement are affected
Private equity deal-doers have resented the extra reporting burden brought by the Alternative Investment Fund Managers Directive (AIFMD), but it has been necessary for a fund to comply with AIFMD if it wanted to benefit from a pan-European "marketing passport" in respect of its European funds.
On the face of it, if the UK loses its EU passporting rights (with no new negotiated terms along similar lines), it will cause great time and cost inefficiency when fundraising in Europe. If a UK PE fund wants to market to EU investors, without the benefit of a pan-European "marketing passport", it would have to make notifications to each relevant member state regulator and comply with those member states′ local regulations under the national private placement regimes for each relevant jurisdiction.
But how much of an impact will this have in reality, and could the lack of reporting actually free up the market? Looking at UK private equity funds raised over recent years, they have certainly depended less on regulatory passports than banks and other asset managers. The vast majority of private equity funds have instead been raised using private placement.
Join the queue
It appears the potential impact of Brexit may therefore be limited in this respect. But it does mean any jurisdiction where a fund is marketing to potential investors will still need to have the relevant private placement infrastructure in place – and the national private placement regimes across Europe are relatively varied at present. Private equity fundraising has worked with this in the past but we strongly suspect that the UK will eventually decide to join the queue of other passport applicants, alongside the US, the Cayman Islands, Bermuda and others. Private equity fund managers that use such a third country passport to fundraise in the EU will still need to comply with AIFMD, but we might find there is scope for a two-tier regulatory framework depending on whether funds want to use the passport.
Furthermore, the impact of Brexit and its potential to reduce the regulatory burden will depend on the future of national private placement regimes, and that is far from certain. Three years from when the European Commission activates the third-country passport provisions in AIFMD (it has not done so yet), ESMA is required to advise the Commission on whether national private placement should be abolished under AIFMD. In that case, private equity funds would have no option but to apply for the third country passport (and comply with AIFMD) to fundraise in the EU. Although the end of national private placement is by no means a forgone conclusion, it is on the endangered list.
It is uncertain as to what the post-EU regulatory landscape will look like. It all depends in the end on the type of relationship negotiated between the UK and the EU, and in particular how a UK private equity fund will be able to gain access to European investors (if it chooses to do so). This will in large part be likely to hinge on the nature and scope of the regulatory regime that UK private equity fund managers are eventually subject to, and how they compare to the regulatory obligations currently in existence under AIFMD.