European cities like Frankfurt, Berlin and Amsterdam are certainly hoping they will do so, rolling out the red carpet for financial institutions looking to move their London base.
Many banks, stock exchanges and asset management businesses say they are considering moving, in what has been dubbed the “Brexodus”. However, executives say that private equity is one part of the City of London that is likely to stay put.
A survey by Preqin found that just 7% of UK alternatives firms are considering moving their operations from London to elsewhere in the EU. Three-quarters don’t think they will change location at all.
One chief executive of a London-listed alternative investment manager told me over lunch that his firm would be very unlikely to move its headquarters, but may change the domicile of a few of its funds to jurisdictions like Luxembourg at some point. That could mean a few extra compliance staff in Luxembourg but no major moves of investment professionals. I’ve heard similar thoughts from several other London-based executives.
The main reason that any financial institution would leave London is because of regulation and the access that this gives them to European markets.
Private equity firms may moan about EU regulation, but compared with other areas of financial services, the regulatory burden they must bear is relatively small.
The average $ 10 billion-plus alternatives fund has just three individuals focused on compliance, according to a 2015 report by EY and mainly has to cope with the Alternative Investment Fund Managers Directive that governs fundraising from European investors.
Of course, it’s difficult to predict what shape any regulation of private equity will take following a Brexit. Still, there are likely to be strategies that make it possible for private equity firms based in London to still get access to European investors, for example through an equivalency regime or a third country passport.
For banks, stock exchanges and asset managers that employ hundreds of compliance staff and have to comply with many more complex regulations, such as the revised Markets in Financial Instruments Directive, that are crucial to their day-to-day business, having a base in Europe is much more important. That’s likely a big reason why more of these institutions are considering moving.
If post-Brexit negotiations do go badly and London-based private equity firms end up finding it difficult to get access to European investors, then some firms may consider moving. But for the most part, we expect private equity to stay put in London.