Ask anyone in the PE industry or the broader financial sector about Brexit and there is one recurring theme: uncertainty.

On Friday morning, much of the uncertainty disappeared in the UK with a resounding Conservative Party victory in national elections.

The fear was that another hung Parliament would mean more delay for Brexit as long as both sides jostled for control of the process. But the Conservatives grabbed a majority of seats in the House of Commons, handing Prime Minister Boris Johnson a strong mandate and little opposition to push through his party's agenda to leave the European Union.

Johnson had campaigned to "get Brexit done," and now the main unanswered questions will center on the UK's future trading relationship with the EU.

What is certain now is that Brexitwhatever final form it takesis happening. On the other hand, a new round of uncertainty is about to begin for the private equity industry, said Michael Halford, a partner in the Goodwin law firm.

Post-Brexit, a major unresolved sticking point will be whether UK-based fund managers will face new burdens on future fundraising in EU countries.

"While for private fund managers nothing would change for much of 2020 due to transitional arrangements, what happens after the end of the transition period is still an unknown," Halford wrote in a note published on election day, anticipating a Conservative win.

Under current rules, all European managers operate under a single regulatory framework known as the Alternative Investment Fund Managers Directive, which governs how European funds do fundraising across Europe.

Some managers have already prepared for Brexit, either by setting up an office in an EU country or by complying in a piecemeal fashion with national private-placement rules in each separate jurisdiction.

After the UK leaves the EU, however, UK-based PE vehicles will no longer be part of the AIFMD. This means the UK will be legally considered offshore and lose its AIFMD status, essentially barring UK-domiciled funds from seeking capital from LPs based in EU countries. Analysts say this is likely to result in an aggressive shift of fund domiciles activity away from the UK into offshore territories like Ireland, the Channel Islands and Luxembourg.

UK managers could still retain European fundraising benefits through a so-called third-country passport under a provision of the AIFMD rules. Halford notes this would allow non-EU managers managing non-EU funds to opt into AIFMD compliance and still be allowed to market freely in EU countries. But how that would work in practice is unclear.

"There is significant uncertainty around how this would operateeach non-EU manager would have to nominate a member state of reference and presumably be subject to oversight by that member state's regulator," Halford wrote. "Even more significant is the fact that the third-country passport should already be in place and there are currently no signs of the EU implementing it."


For more insight on Brexit and AIFMD read PitchBook Analyst Note: Post-Brexit Domiciling of European PE Funds: Part I
Featured image via Drazen_/iStock/Getty Images Plus

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