Brexit, Private Equity and knowing how to wait

by Moris Beracha

Possibly the consequences of Brexit are not as negative as predicted or that the adaptation of markets is faster than previously thought...

Moris Beracha.- In recent days there has been a negative reaction on the possible consequences of Brexit for business in Great Britain and in the European Union. It is said that British banks, firms and even individuals living within the EU will face a change in the tax regime of trade-exchange treaties. It has been predicted – even – jobs losses in the financial sector and that access to capital will be limited.

Now, seeing what has happened in the first few days, we must say that the pound sterling and the euro certainly suffered a sharp fall against the dollar, which primarily affects US exporters who must deal with a stronger currency. But we must also say that Private Equity firms can take advantage if they realize the opportunities that could arise since as the dollar increases international assets become cheaper.

Hence we begin to hear many say quietly that even if there is a fall in capital – and the raising of funds is affected within Great Britain – investors and fund managers must begin to find other markets to meet the offers. It is not wrong to say then that investments should seek new geographies and create multi-jurisdictional portfolios that may be less susceptible to nations at political risks.

One of the great advantages of Private Equity when there is a crisis or when there is a challenge is that you can keep your head down and face a long game. I read this argument for Ferry Murphy, Chairman of Blackstone Europe, who recently explained that Private Equity behaved admirably – if compared to other segments – during the Great Depression. It is clear, that few do foretell that returns occur in these conditions but you must be cautious in the analysis.

Murphy also pointed out that any period of post-Brexit uncertainty will be nothing compared to what happened during the financial crisis of 2008 where – in addition – the British financial industry came out very well. That is, Murphy is suggesting that we put ourselves in perspective.

I later came across an article in the British newspaper The Telegraph announcing that the two largest houses of Private Equity in Britain had closed two billionaire businesses in Europe, despite the concerns existing due to Brexit.

The first is Cinven, which supports the luxury shoe store Kart Geiger, and whose new operation was the largest so far made for 7 billion Euros (5.8 billion pounds).

Meanwhile, Cinman’s rival firm named Ardian also announced that it had managed to raise funds for 830 million pounds to acquire the total of some stores in Europe.

Why were these two major operations closed at the moment? Possibly the consequences of Brexit are not as negative as predicted or that the adaptation of markets is faster than previously thought. We do not know yet but those who did such operations were very clear in what they were doing.

Obviously there is concern that some European Private Equity firms will be backing businesses in Great Britain. But in cases like this, where the political aspect is not clear, one must be careful not to make decisions that are hurried or based on the usual nervousness of those who want quick profits.

We do not know how the story of this non-binding referendum will end and that Boris Johnson and his aspirations to become prime minister are not longer present. What we do know is that the British economy has been able to overcome and adapt to important changes throughout history, and that being constituted by a large sector of financial services, capital will know how to protect its place. The key is knowing how to be in the right moment.

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