On the same day that a panel session tackled the topic of Brexit, Theresa May was about to present the final deal to her ministers. Resignations were widely thought likely to follow.
By the time you read this, it’s anyone’s guess where the Brexit process will be.
Since the UK’s June 2016 referendum, Brexit has been high up on the geo-political risk agenda of most investment professionals, largely because of the amount of uncertainty involved. But given that the panel discussion took place at SuperInvestor 2018 in Amsterdam, the key question was how much impact it had been having on private equity.
It was ever thus
Uncertainty was hardly anything new, said Charlie Troup, Managing Partner at Duke Street. “Our job is to navigate all risk, and it’s not the same across all sectors. Manufacturing businesses across Europe will be more affected because of disruption to supply chains, but healthcare and the pharma space, which rely heavily on government spending, less so.”
“Generally, it’s the same job we’ve always had, trying to find businesses where you can price in the uncertainty and try and have value drivers that don’t depend on the macro situation. That’s what we’ve always done, and that’s what we’ll carry on doing,” he said.
David Jeffrey, Partner at StepStone Group, which has a pan-European strategy, said that international investors see Brexit within a wider context of continuing risk factors throughout Europe. “It’s not as if investing in the Continent versus the UK will mitigate uncertainty,” he stated. “All investors are sold on the basis that private equity benefits from uncertainty and the market inefficiencies that it brings about.”
David added that the UK still enjoyed the largest share of European deal activity, because of the key private equity infrastructure that resides there, such as legal services and the plethora of funds and track record. “These are all things that give investors confidence. Looking from a global perspective, Europe will always be important given the size of the economy and population. As a component of that, the UK will continue to form an important part,” he said.
Even when looking at the impact not only of Brexit but of a possible change in UK government, Charlie felt the industry could handle it: “For businesses it could be a double whammy, but when markets are up it’s hard to buy well, when markets are down it’s hard to sell well, there is always an opportunity somewhere.”
Considering the portfolio risk
Most portfolio managers will have already considered the risks to their portfolio inherent in Brexit, felt the panel. The key was investing in sub sectors and not gearing too highly and making sure that the management capacity was there.
It was important to carefully plan ahead, explained Charlie: “Think about the worst and think about how to deal with your customers and staff if it happens.”
An added problem, David pointed out, was that the UK government had done such a terrible job of giving any clarity at all on what the future scenario might look like. “I feel for GPs but also for their underlying companies, because managing for the outcome is impossible – no one has any idea what it will be or how to plan for the future.”
But the basic feeling of the private equity panel was that Brexit wasn’t anything the industry couldn’t handle.
“The risk assessment is well within private equity capabilities,” said Richard. There are macro filters you would put any potential investments through that would help you to assess Brexit risk, that help you filter out the companies that come out relatively exposed.
“The harder issue to grapple with was the political dimension,” he added. “But we’ve been grappling with that for the last 50 years.”