Brexit – Potential impact on London based private equity managers
On June 23, the UK voted to leave the European Union. This event, termed “Brexit,” will trigger Article 50 of the Lisbon Treaty, initiating a two-year withdrawal process and establishing a new relationship between the UK and its former EU partners.
The implications of Brexit span numerous sectors including financial services, trade, employment, tax, and competition. Asset managers—whether based in the UK, EU, or elsewhere—will experience varying degrees of impact from this decision.
Loss of EU passporting
A significant consequence involves the loss of managing and marketing passporting rights into the EU. “Passports have been used extensively to further the single market” and have enabled asset managers to concentrate operations in centers like Dublin and Luxembourg. Non-EU managers from the US or Switzerland established London hubs to access EU markets via passporting. Post-Brexit, UK firms would no longer qualify for these passports under existing EU legislation, affecting those relying on them to distribute funds or provide cross-border advisory services.
Managing and marketing of UCITS and AIFs
UCITS funds must be EU domiciled and managed by EU management companies. Following Brexit, UK-established UCITS funds would fall outside the UCITS Directive’s scope, losing passport provisions that permit cross-border management and marketing. UK-domiciled funds would likely be reclassified as alternative investment funds (AIFs) under AIFMD.
Change of domicile and delegation
The loss of passports may prompt funds to relocate. UK management companies could no longer manage EU UCITS, nor could EU companies manage UK UCITS. Establishing new management companies in respective jurisdictions—potentially through group reorganization—represents one solution. New companies could delegate portfolio management to existing ones, subject to UCITS Directive delegation requirements for non-EU managers.
Changes to investment mandates and parameters
UCITS cannot invest more than 30% of assets in non-UCITS collective schemes, necessitating mandate reassessment. Both UK and EU asset managers must reconsider EU-related investment parameters to accommodate investments in the EU (excluding the UK) and separately in the UK itself, requiring updates to management agreements and fund documentation.