The biggest international banks have been making Brexit contingency plans for some time. Should UK voters choose to leave the European Union this summer, Deutsche Bank may withdraw staff, possibly to Germany, while Dublin is said to be the destination of choice for other international lenders (and PDI’s editor).
Private debt funds, on the other hand, seem content to wait and see.
It’s not because they think Brexit won’t happen. The ‘leave’ momentum has proven stronger than anticipated when the prospect of a UK withdrawal was merely an academic exercise; as one market player said of the vote on 23 June: “It’s going to be a lot tighter than anyone thought.”
But the fund managers PDI spoke to suggested the ebb and flow of international regulations was just part of doing business and any Brexit-related issues would be treated in the same vein.
As long-lock structures – many of which are domiciled in Ireland, the Netherlands or other EU jurisdictions – and a global investor base, private debt funds have to be comfortable with cross-border structures. There are questions around how an exit would have an impact on their ability to fundraise in Europe, but those issues would likely be resolved gradually post-exit.
That said, while Brexit may not pose an immediate threat to their business models, it’s strange debt managers aren’t more concerned, considering those active on a pan-European basis are mainly headquartered in London. The UK is also the largest market for private debt – direct lending in particular, though it has also been a major source of distressed and non-performing loan sales.
Any exit could seriously undermine the progress made by private debt in Europe.
How would a non-EU member Britain fit into the Capital Markets Union? It wouldn’t, at least not without agreeing to the kind of EU rules that the leave campaign rails against. The free movement of capital, without which modern market lending is unthinkable, is a core tenet of the EU. It’s not something they are obliged to extend to a non-member without some sacrifice on Britain’s part (cf. Norway and Switzerland).
Worse for private debt – and the continent as a whole – is the worry that the aftershocks of a British exit would include strengthened leave movements elsewhere. The Netherlands – whose regulatory regime plays host to many alternative lenders – is high on that list.
PDI is by no means advocating a panic, but it could once again be time to take a leaf out of the banks’ books and make some contingency plans.