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Brexit & Private Equity: Roundup on Deal Flow and Opportunity

A new CNBC report indicates that “private equity deal flow sinks in Europe in wake of Brexit vote.”

The piece cites data from PitchBook and states: “The value of private equity deals in Europe has slumped by nearly a quarter during the first nine months of 2016 compared with last year, as the pace of deals in the U.K. and Ireland showed a marked decline in the wake of the EU referendum.”

“The first three quarters of the year saw 249.4 billion euros ($275.9 billion) invested into 1,989 deals, heralding a respective 23 percent and 11 percent slide in both measures of activity, compared to the same period in 2015.”

What is not clear: Is this trend because of an endemic slump or because of delays that occurred because of the Brexit uncertainty?

PE Hub reports that “a majority of private equity firms in the United Kingdom and many across the continent delayed fund launches following the Brexit vote, and a sizable number of them anticipate European startups will see less investment as a result of the election-box decision in the U.K. to leave the European Union, according to a study.” The study came from a survey of 160 GPs and LPs released by the law firm Mourant Ozannes.

PE Hub: “The work also found that about two in five U.K. general partners are considering changing the jurisdiction of their funds.” The piece also notes, “Perhaps most concerning to private equity in Europe is the belief by 47 percent of the respondents that the Brexit vote will lead to a decrease in investments in European companies. Fewer – a third – anticipated an investment reduction in U.K. companies.”

But where there’s change, there’s also opportunity.

The Boston Consulting Group explains “Why Brexit Offers Opportunities for Private Equity.” BCG writes: “The United Kingdom’s vote to exit the European Union is already leaving a mark on the country’s economic landscape. The full timing and extent of the break are uncertain and may not be known for several months, but many British companies are starting to reassess aspects of their business. Private equity firms will have to step up their due diligence and accept additional risk in UK investments. But the breakup also offers an opportunity for PE firms that have honed their capabilities in helping companies deal with change.”

BCG “analyzed Brexit’s likely impact on each sector in five areas where it is most likely to have major consequences:

  • “Foreign Exchange Exposure. Different sectors will be affected differently by the weakening pound depending on their geographic mix of revenues. UK businesses that rely heavily on international revenues will get a boost, while those that sell domestically but import most of their supplies, especially in dollar-denominated currencies, will get squeezed.”
  • “Dependence on EU Labor. Several sectors depend heavily on the freedom of movement across Europe. Many of them rely on low-cost labor, but others—such as health care and financial services—need access to sometimes-scarce skilled workers.”
  • “Terms of Trade. Once outside the EU, the UK will need to negotiate not just with the EU but also with other countries with which it previously operated under EU agreements. Some sectors will be more protected than others, but most are likely to face higher tariffs or lower quotas, or both, when they export. Domestically oriented companies may see somewhat less competition.”
  • “Exposure to EU Regulation. Most exporting industries depend heavily on EU permission to operate, from financial services’ passporting rights to agriculture’s rules on output to aviation’s airport landing rights.”
  • “Growth Constraints. It’s unclear how much Brexit will affect economic growth in the UK or the EU, but sectors sensitive to consumer demand, or whose growth correlates with overall output and productivity, will suffer from a general economic slowdown.”

The “most promising sectors” — and “other sectors of interest” — BCG identifies include:

  • Industrial Distribution
  • Private Medical Clinics and Laboratories
  • Aerospace Manufacturing
  • Employment and Recruitment Services
  • Nonfood Retail
  • Agricultural Suppliers
  • Asset Management
  • Specialty Chemicals

In the Harvard Business Review, Martin Reeves, a senior partner at the Boston Consulting Group, the director of the BCG Henderson Institute, and a coauthor of Your Strategy Needs a Strategy, Philipp Carlsson-Szlezak, BCG Chief Economist, and Stuart Quickenden BCG senior partner and managing partner of its London office, explain why “Companies Shouldn’t Wait to Prepare for the Post-Brexit World.” They “outline measures that leaders can take to minimize downside risks and shape outcomes to their advantage.”