How the PE complex can navigate Brexit right now

NextWave Private Equity

Sally Jones, EY UK Trade Strategy and Brexit Leader, recaps the current state of Brexit and advises PE executives how to navigate the transition.

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The Brexit deal released at the eleventh hour of 2020 caught many businesses off-guard. According to research by UK in a Changing Europe, the economic impact of Brexit is projected to have twice the impact of the COVID-19 pandemic on the UK economy.

The path forward for service-based business remains especially uncertain. Services have become potentially unlawful to provide, as member state regulation, movements of people, and dataflows between the UK and Europe are either unclear or restricted. Questions service providers must now ask themselves include:

• Am I lawfully allowed to provide my services?
• Can I travel to my client to deliver my services?
• Can I legally deliver my services remotely?

Many private equity (PE) investors had already assumed a no-deal Brexit, choosing to pre-emptively migrate business operations from the UK to Europe so they could avoid disruption as Brexit negotiations progressed.

Foreign direct investment (FDI) into the UK fell to near zero in 2020, as wary investors allocated capital to other markets in which they had more confidence. It is possible the retrospective elements of the UK National Securities and Investments Bill and the resulting uncertainty and risk it creates for investors could be damaging to UK attractiveness. The US has now eclipsed the UK as the #1 most attractive G7 nation for investment.

Over the coming months, as the immediate disruption ends, PE investors will have a better idea of how to resize and reshape investments and operations as the “lay of the land” emerges in the UK.

PE firms must monitor how their portfolio companies are trading, as value can erode quickly.

Portfolio companies can employ five tactics to navigate post-Brexit uncertainty:

1. Create a response team that includes senior decision-makers
2. Communicate transparently and frequently to all stakeholders
3. Monitor rapid changes to legalities around dataflow between the UK and EU
4. Anticipate cost increases and decide whether to absorb them or pass them to customers or suppliers
5. Understand new regulations as quickly as possible