By Jon Moulton, Founder of Better Capital
The UK is entering the run-up to a really pretty major decision on whether to stay in Europe – though as yet, we don’t know what staying in or getting out looks like. Whatever Mr Cameron is actually begging from the Eurocrats to encourage the Brits to stay in the party is unknown, and even less knowable is what he may actually be thrown from the very assorted souls in the EU.
However, sometime in the next year Mr Cameron will be screened climbing out of a plane with hopefully a more substantial and enduring message than his predecessor, Mr Chamberlain, extracted in September 1938 – “Peace for our time”.
Political promises have a short shelf-life.
Anyway, I don’t know what Mr Cameron will try to extract but I’m prepared to bet that seeking goodies for the private equity world will not be high on his list.
And yet it could matter enormously to the private equity world and to the importance of London as the hub of Europe’s private equity industry.
I live in Guernsey, which is not part of the EU but does have a very significant financial services industry, so some of the issues about operating outside the EU are familiar to me. Guernsey bends to some EU rules but, importantly, not to all of them – and thrives on it.
London has prospered, and indeed still dominates Europe, in private equity. This domination is down to a number of reasons; strong US links, the rule of law, history, critical mass, talent concentration and relatively sensible regulation have all helped.
Be in no doubt that those in Paris and Frankfurt envy this profitable position and it is partly this that generates the voluminous and ill justified regulation that is regularly poured upon us.
The AIFMD, MIFIDs, EU-based IFRS, the EBA, ESMA, EIOPA and quite a few other lumps of process, direction and regulation generally operate to move power from London and, in many cases, to regulate activity to an extent that they reduce the activity (don’t worry if you don’t know what all these are – hardly anyone does).
Staying in Europe gives no options – we will work in a highly complex political framework where unknown, mostly unelected souls, in bodies where the vote of Luxembourg is as significant as the UK vote, dictate the outcomes.
Over time it is reasonable to expect a relative decline in UK financial services business if the UK stays in. And private equity will suffer with that industry as the generally socialist governments in Europe get easy electoral wins at the expense of the evildoers of private equity.
Coming out is very much harder. We would have options – do we continue to copy and go along with whatever comes out of Europe on the basis that this will facilitate doing business or getting investment with the EU? Or do we decide to go our own way with sensible and easier regulation and taxation, following the theory that the advantages for trading outside the EU will outweigh any loss of trade with the EU? US investors or European investors? Which would you like?
Out and free? Allow yourself a few moments of pure pleasure as you close your eyes and contemplate bonfires of the AIFMD and related regulation. Harden your hearts to live with the images of unemployed private equity Eurocrats... and now back to the real world.
As an aspirant for a world where not many clear principles suffice to control us, you can readily guess where my vote is. However, and as ever, this is a vain wish given the available options – the result of an out vote would be a tortuous discussion and debate as to how to go forward in a complex maze of regulatory options.
But remember, regulation is not all bad. It provides jobs for those who might otherwise find employment difficult to find. The larger firms love it – there are serious economies of scale available to be harvested by large firms in dealing with complex regulation. They can afford the staff to follow up on (say) private placement in the Baltics, which a smaller firm could not justify the cost to cover.
So for those of us in private equity, staying in at least saves agonising over what to do. Simple resignation to more of the same worthless and complex rubbish suffices.
An out vote means lots of decisions and plenty of both opportunity and risk.
I know which I would enjoy more.
You can read the other articles from Ipes' Private Equity update (edition 19) at the following links: