As the battle over Brexit rages at the political level, uncertainty continues to hang over the businesses and the legal profession. As such, “Brexit remains a top consideration” for legal practitioners and businesses, as “people still don’t have full plans to deal with it”.
Given that said uncertainty has lasted three years now, it is perhaps unsurprising that our sources report a variety of ramifications for private funds operating in the UK. For one, according to practitioners, “Brexit has increased the number of private funds players deciding to move to France and Luxembourg.” This corresponds with the data: 2018 saw a 13 per cent increase in Europe’s deal making in the private equity space, but a 12 per cent fall in the UK. Unpicking whether this data is a symptom or a cause of fund flight is still unclear.
It is interesting to note, however, that many funds leaving the UK consist “largely of new players in the private funds space” with some existing players thrown into the mix. Furthermore, sources are keen to point out that “they are not all good players”, which perhaps indicates that more established funds are not yet sufficiently nervous to pull the trigger on setting up shop in Europe.
This movement of funds into the European market has engendered “fiercer and fiercer competition” on the continent. It has also translated into “more use of Luxembourg vehicles than ever before, especially from England”. One interviewee says, “Since the 2016 Brexit vote, if you are a new manager in a large fund with no existing ties to the UK, then you will probably go to Luxembourg now as it should be fairly future-proof.” This is not to say that there is an exodus of private funds from the UK. Several private funds specialists advised us, “If clients are tied into a jurisdiction, then there are still ways you can keep your existing structure.”
The flight of funds from the UK is being exacerbated by the overtures of European states, who are luring managers with the siren song of significant tax incentives. Those we spoke to this year also confirmed another source of trepidation, other than Brexit, that is feeding into the nervousness of private funds executives: the prospect of a Labour government led by Jeremy Corbyn. Practitioners report that they have “done a lot of ‘Corbyn’ planning for those who don’t want to face his high tax rates”.
In conclusion, until Brexit uncertainty is resolved it is unlikely that private funds in the UK will cease to explore European options for relocation. In turn, this is likely to further affect deal volumes in Britain, and encourage funds to look further afield and take part in more active markets in Europe that are less weighed down by uncertainty. Even when Brexit is finalised, anxiety will remain around the next government, as well as its position regarding the corporate world and how it ought to be regulated and taxed. This may drive more funds into the waiting arms of European financial centres, eager to house them.