The UK has now left the European Union and the decision has long-term consequences for the European private equity industry with the emergence of new activities, increased multipolarism and deeper complementarity between London and EU financial centers. Is a shifting balance of power to be expected?
Post Brexit, passporting rights under both AIFMD and MiFID have been lost, leaving UK managers reliant on third country market access routes. Without the availability of passporting rights in connection with the cross-border supply of management or marketing services within Europe, some PE firms have established AIFMs and MifiD firms in Luxembourg and other continental European financial centres.
“The purpose is to take advantage of EU passports when marketing to investors, providing investment advice or executing investments on a cross-border basis,” says Henri Wagner, Partner at law firm Allen & Overy.
The purpose is to take advantage of EU passports when marketing to investors, providing investment advice or executing investments on a cross-border basis
The post-Brexit financial services landscape is one characterised by a deepening multipolarism, with companies moving staff or expanding operations to a number of specialised financial centres across the EU.
In UBS Asset Management’s case, Luxembourg will act as the new home for their alternative fund ranges, which were shifted out of the UK, and will now be offered via contract mandates with UBS Fund Management Luxembourg (FML). The entity, which received the license for performing discretionary mandates, will become the head of a network of branches in different locations across Europe.
“Brexit impacts any global financial institution, even though, groups such as UBS will be able to manage it as an opportunity rather than a constraint. Clients will benefit from the Luxembourg entity’s fund management expertise and this will be replicated in the different UBS FML branches, to have one overall and scalable approach,” highlights Francesca Prym, Head of UBS Fund Management in Luxembourg.
Brexit impacts any global financial institution, even though, groups such as UBS will be able to manage it as an opportunity rather than a constraint. Clients will benefit from the Luxembourg entity’s fund management expertise and this will be replicated in the different UBS FML branches, to have one overall and scalable approach
Increased complementarity
As we move forward with this new multipolar environment, firms will take strategic relocation decisions based on the local expertise best suiting their needs such as investment banking in Frankfurt and Paris, trading in Amsterdam or asset management in Luxembourg. The Grand-Duchy is strengthening its expertise in the alternative space, making it a hub from which PE firms can tap into a unique reservoir of skills and unrivalled technical know-how to support their cross-border distribution.
“If we look at European domiciles, Luxembourg is the hub for Private Equity. It is easy to find the right expertise,” says Prym.
For UBS, know-how comes in a number of forms, from the technical aspects of PE fund set up and management to sales support.
“Operational and oversight duties are carried out in Luxembourg where the technical knowledge is, while sales experts specialised in the offer of alternative business are based across different markets to be close to our clients,” notes Prym.
From the Grand Duchy, PE firms benefit from a sophisticated ecosystem dedicated to supporting fund managers, while Luxembourg law offers funds and investment platforms a broad range of structuring options with access to EU Directives.
While London is expected to keep its role as a key hub for PE and the main European home for deal teams, specific activities reinforcing complementarity between London and EU financial centres are emerging.
Brexit has accelerated an increase in headcount within the PE industry, as firms had to make sure that those entities have the necessary human resources on the ground to be able to function properly, comply with regulators’ expectations and protect investors’ interests. While fund raising by PE firms continues to be extremely strong and deal-making has been busy, a rising demand for specific needs can be seen.
We see a continuing expansion of the investor relations and fundraising teams on the ground, as well as legal, compliance and tax functions
“We see a continuing expansion of the investor relations and fundraising teams on the ground, as well as legal, compliance and tax functions,” explains Peter Myners, Partner at Allen & Overy.
On the service provider side, a steady shift from the traditional role of “local counsel” to the one of “lead counsel” is taking place, specifically in areas related to fund raising, co-investment processes and the negotiation of related documentation.
“This is driven by the growth of the teams in Luxembourg within PE firms who are leading on these matters, plus the increased prevalence of Luxembourg law as the governing law of major contracts and a legal toolbox that constantly improves, among which one can find financial collateral arrangements or professional payment guarantees,” he adds.
While the trend of expanding teams has been accelerated with Brexit, Myners highlights that it has already been in motion for the last 10 to 15 years.
“Many of the largest players in the PE industry have chosen Luxembourg as their main hub for raising and deploying capital in Europe. The general requirement by certain institutional investors to invest into onshore rather than offshore fund structures, the changes driven by the OECD’s BEPS action plan, and the operational benefit of having an in-house team administer large and complex investment platforms have all contributed to this trend.”
Many of the largest players in the PE industry have chosen Luxembourg as their main hub for raising and deploying capital in Europe.
Shifting investor opportunities
PE expertise within traditional wealth management hubs in Europe has been strengthened and the asset class is growing in popularityamong high-net-worth individuals and other wealth management clients able to lock up money for the medium to long term without looking for returns in the short-term. With the industry offering so many alternatives in terms of strategies, its appeal has been broadened.
“Private Equity investments allow wealth management to add an asset class to their portfolio with strong long–term returns and a low correlation with market trends, making this investment suitable as an instrument allowing a good generational handover,” notes Prym.
Private Equity investments allow wealth management to add an asset class to their portfolio with strong long-term returns and a low correlation with market trends, making this investment suitable as an instrument allowing a good generational handover,
Trends are poised to gain ground over the long term, especially product diversification enhancing the ability of many funds to grow their assets under management.
ESG aspects are increasingly incorporated by PE managers into investment analysis, decision-making and monitoring of portfolio companies through a robust responsible investment policy, while sustainability aspects are becoming part of key risk exposures in PE deals.
“ESG continues to be a big theme for the industry, as does the sheer growth and geographic expansion of PE firms, their enhanced sector focus, and their shift from pure buy-out strategies into private debt, infrastructure, PE real estate and other asset classes,” adds Myners.
ESG continues to be a big theme for the industry, as does the sheer growth and geographic expansion of PE firms, their enhanced sector focus, and their shift from pure buy-out strategies into private debt, infrastructure, PE real estate and other asset classes,
Like many other industries, PE was not immune to the market volatility resulting from the 2020 challenging market environment. Despite uncertainty, firms have demonstrated the ability to continue to deploy capital, help guide portfolio companies, and return capital to their investors. With continued low-interest rates combined to the threat of inflation potentially rising, industry players are confident that the industry worldwide will continue to fly high.
“As pension funds and other investors continue to seek attractive risk-adjusted returns, as debt markets continue to be open, and in the aftermath of COVID, shifting consumer behavior and technological advances create investment opportunities across multiple sectors, our expectation is that the PE industry will continue to thrive in Luxembourg and internationally,” concludes Myners.