Discussions about Brexit at Super Return in Berlin last year were peripheral and indeed theoretical. It was an issue managers needed to be aware of, but very few actually reckoned it would happen. Brexit is now a reality, as is recognition that Single Market access for UK financial institutions is coming to an end. There seems to be a dual private equity approach to Brexit. The first comprises managers located outside of the EU whose fundraising activities are concentrated ex Single Market. These firms take an agnostic approach to Brexit. Those with EU interests are clearly watching market and political developments intensely.
The latter are identifying the best course of action to deal with Brexit. Unfortunately, clarity from policymakers is in short-supply meaning managers are preparing for Brexit, but they are unsure as to what it means. The Association of the Luxembourg Fund Industry (ALFI) recently revealed AuM in the country is at record highs, much of it driven by interest from private equity, real estate and hedge funds following implementation of the Alternative Investment Fund Managers Directive (AIFMD). Attendees at Super Return looking at post-Brexit options are leaning towards Luxembourg as a gateway to EU investors.
2. Broker-Dealer Registration
Private equity firms are increasingly weighing up whether they need to register with the Securities and Exchange Commission (SEC) as broker-dealers. This derives from a $3.1 million SEC settlement with a private equity adviser, which was charged with performing brokerage services and charging fees without registering as a broker-dealer. Private equity firms at Super Return acknowledged some of their activities could fall into grey areas, but advised registering as a broker dealer if there was any inkling of doubt. This obviously comes at cost, and will require the relevant staff to take FINRA examinations.
3. De-Regulation in the US
As with Brexit, nobody quite knows how President Trump’s deregulatory agenda will pan out. Statements about a “one in, one out” approach towards regulation need further articulation. Pronouncements about Dodd-Frank being repealed should also be taken with a pinch of salt. Subtle changes may be enacted but wholesale abolition is very unlikely. There is speculation that enforcement actions – which were extremely uncompromising during the Obama administration – may be less severe, but firms should not disregard their compliance obligations in any respect.