We suspect most people, especially those living in the UK, will remember what they were doing on 24 June when they first learned about the UK’s decision to exit the European Union. Your humble scribe, for one, awoke from a fitful sleep at around 4.30am and, having casted around for his mobile phone, was jolted awake by a rush of adrenaline upon seeing ‘Leave’ had pulled ahead of ‘Remain’.
So it was only fitting that at our cross-asset class roundtable – which featured veterans from Allianz, HarbourVest, Hermes and M&G – our first question was: can you describe the mood in your organisation on the morning of 24 June? The answers, unsurprisingly, included words like “sombre”, “shock” and “disbelief”.
Initial reactions aside, we also discussed potential impacts on HR, dealflow, investor capital flows, evaluating risk and other Brexit-related issues. Here are four key takeaways.
One global private equity-focused participant said reassuring staff at his firm’s multicultural London office became as big a priority as reassuring investors. With a team of 40 made up of 10 UK nationals and 30 (mostly) EU citizens, that’s not surprising. All of a sudden, it became necessary to assuage the concerns of the majority of the firm’s staff and help them plan for things like residence permit applications and the like. Tellingly, there were no immediate plans to relocate the London office, although Brexit did prompt thoughts about the opening of other European offices, perhaps in Dublin. The motto, though, was no immediate changes.
Brexit is not a 2008-level event
Brexit, especially for non-European investors, is seen as materially different from the 2008 financial crisis, very much a local event compared to 2008’s global shock to the system. An infrastructure-focused GP flagged that Asian investors, for example, were still very keen on the UK market and keener still for politicians from the UK and the EU to sort their differences out so business as (close to) usual can resume.
Pretty much everyone around the table also recognised that the global financial system was much more resilient, with abundant liquidity being an obvious difference to the GFC. That’s not to say to say returns aren’t being hit on certain asset classes (we’re looking at you, real estate) or that deals and investor commitments aren’t being put on hold. But on balance, the post-2008 investment freeze is unlikely to be repeated.
Load up on deals
In fact, as one private equity GP said: “We should’ve loaded up on everything that moved in 2009.” That’s a colourful way of expressing regret for not executing on more good deals in the immediate aftermath of the global financial crisis, a mistake our participants were determined not to repeat. The reasoning being that if you’ve done your due diligence on an asset and that asset is a good one, then you should go for it. Or as one participant put it: “If a deal looked good a month ago, it looks good now.”
Brexit is ‘perversely’ good for infra
It feels slightly “perverse” to say it, as one participant phrased it, but Brexit actually offers a few uplifts for investors holding UK asset portfolios. For a start, the pound’s sharp depreciation is, in effect, importing inflation, which has a positive impact on the valuation of RPI-linked infrastructure assets. Second, if you’re a listed fund, you’re already benefitting from a classic flight to safety effect, with your share price appreciating. And finally, there’s the ‘positive’ effect on the UK as an infrastructure market. In a nutshell, the UK, already one of the world’s premier infrastructure markets, is likely to need even more private infrastructure investment post-Brexit, albeit perhaps couched by some government ‘incentives’. What’s not to like?
*Look out for the full version of this roundtable in the September issue of Infrastructure Investor