Last week, David Rubenstein, the founder of the Carlyle Group, a private equity firm with over $200 billion under management, advocated for a second referendum in the United Kingdom on the issue of Brexit. As leveraged buyouts decreased and the U.K. economy slowed, Mr. Rubenstein argued that the U.K. population were misinformed about these negative consequences during the first referendum whereas a second referendum would provide an opportunity for better informed citizens to reverse Brexit and help both British and European economies and private equity firms alike.
Since the referendum in 2016, the vote to leave the European Union cost the United Kingdom’s economy an approximate $26 billion to $40 billion. Private equity transactions in the U.K. decreased 55% from $29 billion to $13 billion, while the treasury forecasted a slowed economy in the long run. However, in 2017 private equity transactions took a surprising turn and increased to a high of 118 transactions estimated at a whopping $37 billion. Although world markets were performing very strong at the same time period, the increase of transactions showed that there is still hope in investors for economic success in the United Kingdom after Brexit. Nevertheless, private equity transactions once again decreased in 2018, totaling $18 billion while total transactions value in Europe flourished with an increase of 15%.
Despite the referendum results and deteriorated economy, exports and imports still flow freely between the European Union and the U.K. until the Brexit vote is finalized by U.K. parliament. Prime minister Theresa May has “delayed” Brexit, which is technically referred to as Article 50, to March 29, 2019, because of unsuccessful negotiations on the Withdrawal Agreement between the European Union and U.K. cabinet members.
The delay highlights the current uncertainty in the private equity landscape over the future profits of U.K. portfolio companies as tariffs and border control remains unfinalized. Mr. Rubenstein said that businesses “can adapt to many different rules, but they like to know what the rules are.” This explains the decrease in private equity activity in 2018 and 2019 as Ms. May struggles to find middle ground between the U.K. parliament and the European Union.
Regardless of the terms of the withdrawal agreement, the Bank of England predicted that all sectors will not benefit financially while the United Kingdom have to also deal with the loss of $838 billion dollars a year from the European Investment Fund. Without any agreement with the European Union, the U.K. is forecasted to lose about 8% of national income or $209 billion when operating under the terms of the World Trade Organization. Under a free trade deal, the U.K. is expected to lose 5%. And under the best-case scenario of a single market system, the U.K. is forecasted to lose 2% or about $52 billion.
At the moment, private equity companies remain in the dark regarding the current terms on tariffs, custom arrangements, and border facilitation between the U.K. and the European Union. As a result, PE firms like Brookfield have refrained from taking multibillion dollar valued Intu Properties public in Britain.Despite the negative atmosphere for private equity in the U.K., the large increase in leveraged buyouts in 2017 indicates that if a Withdrawal Agreement is struck with concrete terms, then there could be a bright future for private equity in the United Kingdom.