3rd May 2016
Despite signs that it is slightly more likely the UK will vote to stay in the EU, we are clearly seeing a nervousness in the UK market and an associated slowdown of activity as many adopt a ‘wait and see’ approach.
Most of the fund managers we have spoken with seem confident the UK will remain in Europe and are not doing much in terms of contingency planning. Tax treaties will remain in place whatever the outcome of the vote and they are therefore mostly sanguine on the issue of fund domicile with new structures. After all, they are well aware how it took Britain twelve years to join the EEC, the forerunner to the EU, after resistance from France: Just as it took years to enter, so it would it take years to fully exit.
Some managers are however trying to take advantage of the uncertainty. Pan-European funds continue to bid on assets outside the UK but some firms have been taking advantage of a lull in UK deal activity to invest in the UK at prices they think attractively reflect the risk of a Brexit given they expect Britain will ultimately remain in the EU. That said we have heard of instances of ‘Bremain’ contingency clauses being drafted into commercial real estate sale agreements. These allow purchasers to walk away without penalty from a UK transaction should an Out vote transpire.
We are also aware that the slowdown in the UK has led to ‘discreet marketing’ of assets at softer prices. Rather than risk a valuation write down, we see sellers only ‘testing’ potential appetite among select purchasers instead of openly going out widely to the market.
Having said that managers are mostly not reacting to Brexit, some fund managers of Euro denominated funds investing in Sterling assets are very concerned about FX risk and are hedging out any foreign currency exposure. In the case of one euro real estate debt fund we spoke to, the uncertainty around Sterling’s value against Euros or Dollars has led to an increase in the net cost of such hedges. This has the effect of forcing lenders to either accept lower returns by absorbing this increase in cost, or passing on the increased costs to borrowers in the UK. If more funds do the latter, it will reduce the amount of capital available to the UK market at low rates.
Therefore, with the possible exception of managing FX risk and ensuring flexible wording to agreements for deals closing prior to the vote, the message to clients is to avoid any knee jerk reactions.
If you are concerned in any way with the jurisdiction of your deal structuring, please do give us a call. Langham Hall’s London, Luxembourg and Channel Island offices will work together to ensure clients are covered in the appropriate way and can provide additional AIFMD depositary services or regulatory reporting covering Annex IV and FATCA. Should a Yes vote materialise, services can be novated between these offices should managers wish to remain in Europe and funds coming to market now can think about novating at a later stage.
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