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Brexit brings additional bureaucracy for private equity

After years of sorting through the implications of Brexit, private equity firms backing U.K. businesses say the impact of the coronavirus pandemic have largely outweighed that brought on by the U.K.'s exit from the EU.

The pandemic, and its consequential travel restrictions and economic impact, are masking the Brexit effect, but it has not been long since the deal was reached and the practicalities are only slowly becoming clear, U.K.-based pan-European investor Silverfleet Capital Partners managing partner Gareth Whiley said in an interview.

"[Brexit] clearly hasn't been the cliff edge that we were fearing if there had been no deal but there's not no change at all. Things will work through, I'm sure," he added.

For U.K.-focused lower-mid-market manager WestBridge Capital LLP, the import/export component of Brexit has been interesting, but it is not particularly relevant for the businesses it owns.

"Clearly, it's great to get a trade deal compared to not having one," managing partner Guy Davies said. "We will be investing in an economy with shocks in it, but nowhere near as big as the shocks could have been," he said.

Bureaucracy

The biggest headache for managers operating companies that import or export across the U.K. and Europe has been the added bureaucracy and its cost.

Brexit-related supply chain and disruption issues were anticipated, and there has been additional scrutiny in the wake of the pandemic. Some private equity-backed companies had to incorporate E.U. entities where previously they were not needed. But despite early preparation, the realities of Brexit leave problems to contend with.

For businesses that deal in goods "there is no doubt that bureaucracy and the cost of doing business has increased," which is partly because some supplies are disrupted due to value-added tax complexities and import/export delays, Markus Golser, managing partner of U.K. mid-market firm Graphite Capital Management LLP said. These issues have had "a real impact on the ground" because of the "increased bureaucracy and complexity," and in some cases "makes trading very unpalatable."

"Is it better than no deal? Yes, at the end of the day, I'm sure it is. But it nonetheless raises, I think, questions over the benefits that these businesses were promised and clearly aren't seeing. So I can only see the cost and the increased admin complexity at this stage and none of the good things," Golser added.

Many of Silverfleet's portfolio companies stocked up or exported ahead of the Brexit deadline, partly because of the risk of a hard Brexit, and also due to the coronavirus pandemic. U.K.-based CARE Fertility Holdings Ltd., for example, bought large supplies of personal protective equipment.

While it has not yet seen any disruption, it is starting to see where it could appear in coming months in the form of bureaucracy and delay, Whiley said. In the case of CARE Fertility, PPE was bought due to supply concerns spurred on by the pandemic rather than Brexit, and its supply will remain a worry. "Obviously, if there's more red tape, then that will be another thing to just factor into the supply chain."

Rules of origin are another potential supply chain issue for portfolio companies. The agreement requires a qualifying level of processing in the country of export to access zero tariffs. The rules of origin determine the origin of goods based on where the products or materials used come from.

"There are teething problems with this deal. We're finding out it's not entirely tariff-free," Tom Whelan, private equity partner at McDermott Will & Emery LLP said. In the automotive industry, for example, which uses multiple manufacturing sites, imports and re-exports until the final product is reached, "it's going to cause problems," Whelan added.

One European Silverfleet portfolio company is experiencing delays from a U.K. manufacturer in its supply chain due to the supplier having to comply with new rules of origin procedures. "They're having to prove that they're adding more than 50% of value to each and every product and then getting it approved, which is proving slow," Whiley said.

"Fortunately, we've already built up stocks because of Brexit risk and because of COVID, but we are keeping a very close eye on that because it will cause some disruption to us," he added.