Preparing for a Hard Brexit

What is a hard Brexit?

A hard Brexit involves a deal whereby the UK not only severs ties with the EU, but the customs union and single market. With no precedent set for a country leaving the EU, speculation as to the exact divorce terms is rife.

Ultimately, the UK will have to pay a withdrawal cost for departing from the EU, but this will allow the UK to sign independent free-trade deals with no restriction. Current views are that the UK may adopt the current relationship that Canada has with the EU. However, there are significantly more complicated ties that the UK currently has with the EU. For example, the “passporting” of UK financial services into the EU will require detailed analysis.

What does a hard Brexit mean for the UK economy?

Defining a financial cost for a hard Brexit is merely an estimate, because of the unprecedented move.

Leaving the advantages of EU membership behind and switching to WTO trade rules is estimated to cost the UK's businesses about £65.5 billion per year. Analysts postulate that the UK will find it difficult to replace the lost trade revenues from the EU. About 44% (or £220 billion of £510 billion) of the UK's exports currently go to EU countries.

While the country might be able to sign independent trade deals across the globe it might also find it difficult to match the negotiating power of the EU.

What does a hard Brexit mean for UK PE?

Most analysts view that the largest impact will be across these sectors: Financial Services, Automotive, Agriculture/Food/Drink and Consumer Goods, but most private equity firms indicated that it is very difficult to quantify the exact long-term impact of Brexit on deals or the exit strategy for existing investments.

However, inbound M&A activity in the UK (i.e., foreign capital investing into the UK market) reached an all-time high of $251 billion in 2018, up a remarkable 151% from the prior year, there were 27 acquisitions of UK-based companies greater than $1 billion in value. This compares to 21 in 2017 (according to Callan).

There are several reasons why PE firms are still ploughing capital into the UK:-

• Since the referendum (June 23, 2016), the pound has depreciated roughly 10% vs. both the US dollar and euro. The cheaper pound has made UK targets more attractive to foreign buyers.
• Nearly three-quarters of UK corporate revenue comes from overseas, limiting UK economic exposure.
• The impact of Brexit is concentrated to a few sectors and may not be long-lasting. Most firms are taking a long-term view, focusing on the strategic value of assets.

What does a hard Brexit mean for Berkeley Assets?

At Berkeley Assets, we focus on project specific due diligence, with a long-term view on deployed capital. While we have focused on raising capital in foreign currencies over the last few years, to take advantage of sterling devaluation, we have adopted a more cautious approach to capital deployment for UK asset purchasing up until 31 October.