Illustration by Hannah Robinson
Deal or No Deal, new elections and Brexit’s delay; this seems to describe the current daily routines of the UK Prime Minister Boris Johnson and Michael Barnier, as current chief of negotiations for EU.
Meanwhile, the UK economy is suffering. According to PWC, what is the most alarming is that private equity firm activity in the UK dropped 40% in the first six months of 2019.
Private equity firms fund companies or startups with high level of risk and yield. In most cases these companies or startups are not quoted on the stock exchange; they are launching a new brand or item. When banks and retirement funds disinvest their quote they sell their shares and then they can get a profit.
Many London-based firms, including Metric Capital have decided to relocate to continental Europe. Since the Brexit vote in 2016, Metric Capital has invested in euro and its has opened new offices in countries such as Spain, Germany and France. Many companies are relocating from the UK because in the case of a no-deal Brexit they can expect to lose agreements with European partners.
As is shown already, this relocation triggers a drop of private investments and an increase in private equity activity in other European countries. Already, France has seen a 28% rise in private equity, whilst there has been a rise of 33% in Spain.
Private investments require economic stability in order to develop. The UK’s recent slowdown of private equity investments, stems from the turbulent political climate in the UK.
Downing Street has asked to postpone Brexit and an extension until the end of January 2020 has been granted. It is important to note that the extension letter was signed “Prime Minister of the United Kingdom and Great Britain” as Boris Johnson omitted his signature. This is a tangible representation of political uncertainty for European policy makers, as well as for private investors in the UK.
There is no doubt that investors could improve their business if the UK leaves with a deal in which retains commercial agreements; continuity creates stability. However the unresolved issue of the Ireland and Northern Ireland border furthers the stringent political climate.
Next month the UK will vote in a general election, but what will the outcome of this mean for private equity firms?
If Conservatives win the most seats, and Boris Johnson can get his deal through parliament then private equity investments may stabilise. However this party continues to damage the British private equity markets. The Labour party’s manifesto promises a renegotiation of the UK exit with better conditions, as well as a new referendum on Brexit. I would say that these proposals sound a bit unclear for electors and investors. If the Brexit party wins the election then their push for a no-deal Brexit would be awful for private equity investments and the british economy in general. If the Liberal Democrats won the election they would revoke of Article 50 (the article that triggered the UK’s exiting process from the EU). In my opinion, this is the clearest campaign, with the clearest message for private equity investors. However, revocation could generate doubts about freedom within European treaties.
All in all, Brexit and the latest extension continue to affect the economy and uncertainty continues to hurt investment. The softest form of Brexit possible or the option of remaining must be taken to preserve business stability. The EU is the greatest market in global economy, so Brussels must not be a competitor for the UK, but a fellow.