The impact of the referendum approving a U.K. exit from the European Union and the economic uncertainty that came with it is expected to make it even harder for private equity managers to invest the more than $186 billion in dry powder in their coffers.
nLending hasn't stopped, but financing private equity transactions even outside the U.K. has gotten more expensive due to the uncertainty the vote caused.
nTransaction volume in the U.K and Europe is expected to slow as private equity managers wait for more clarity.
nExisting EU-exposed funds might have to change their investment criteria should the U.K. end up leaving the EU.
nSome private equity firms are reconsidering possible expansions into Europe, while others are deciding whether to move their London offices to Ireland or Belgium.
One immediate impact of Brexit will be the hesitancy of U.S. investors to invest in funds with an EU focus, said Eric Zoller, co-founder and partner at Sixpoint Partners LLC, a New York investment bank working with middle-market private equity firms.
So far, this year 19 funds have raised a total of $13.1 billion for private equity strategies with U.K. exposure, compared to a combined $13.5 billion raised by 30 funds in all of 2015, according to London-based alternative investment research firm Preqin. By comparison, 89 Europe-focused funds raised a total of $64 billion so far this year as of July 5, compared to $71.7 billion raised by 172 Europe-focused funds in all of 2015.
Investors will want to know what percentage exposure private equity funds will have to U.K. companies vs. continental Europe, Mr. Zoller said.
Institutional investors are still assessing the situation.
“The New York State Common Retirement Fund is a long-term investor and is in the midst of evaluating Brexit's impact,” said Matthew Sweeney, assistant communications director for office of New York state Comptroller Thomas P. DiNapoli. “It would be premature to comment.”
The $178.1 billion New York fund has a 7.8% private equity allocation. The fund did not have data immediately available on its European exposure in the asset class, but in June officials committed $256.5 million to Cinven VI, a European buyout fund. London-basedCinven closed its sixth fund at its hard cap of e7 billion ($7.7 billion) on June 29, six days after the Brexit vote. Cinven officials declined to comment, said Julie Oakes, spokeswoman.
For their part, general partners are endeavoring to spend capital commitments in a region rife with uncertainty. And there's a lot of it. The three European buyout firms with the most dry powder have a total of $31.4 billion to spend. Cinven, with $8.7 billion in unspent capital commitments, is ranked third by Preqin on a list of European private equity firms with the most dry powder. Luxembourg-based CVC Capital Partners is in the top spot with $13.3 billion and Swedish private equity firm EQT Partnersis second with $9.4 billion.
Private equity funds with investment criteria that includes making commitments in the European Union will have to change that to include the separate U.K regime or remove the U.K. from the fund's investment focus, said Teri McMahon, partner and head of the private equity team at law firm Alston & Bird LLP. What's more, if a portfolio company is directly affected by Brexit — such as a company based in London that had regulatory authority to do business throughout the EU — the private equity firm most likely would wait to sell, she said.
“Unless there is a compelling reason to sell, perhaps due to the underlying fund nearing the point where it must liquidate its investments and close, most funds will likely wait before putting the portfolio company up for sale until the implications of Brexit are clearer,” Ms. McMahon said.
Mr. Zoller said private equity firms might slow investment throughout Europe as they try to determine which countries will be hit most by Brexit.