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How Brexit will affect the venture capital industry
Venture capitalists are a vital part of the UK financial system. Matthew Partridge examines how the industry will fare after the UK leaves the EU.
Venture capital and private equity employ f a large number of people, mostly in London.
(Image credit: 2010 Getty Images)
Venture capital and private equity firms are important parts of the UK financial system, doing everything from helping entrepreneurs get funding for their ideas to supporting buyouts of established firms. Around £6bn worth of funds were invested in nearly 800 UK firms in 2015 alone.
The sector also makes a contribution to the UK economy through its employment of a large number of people, mostly in London. To gauge the impact that Brexit is having on the sector, and to find out the industry's key concerns, we've spoken to Gurpreet Manku, director of policy at the British Private Equity and Venture Capital Association (BVCA).
In terms of the immediate effect, Manku thinks that the jury is still out. Surveys commissioned by the BVCA suggest that "deals are still taking place", she says; "almost every day we read press reports of another deal going ahead". However, firms and sectors that currently do more business with the continent may have been affected. It's also the case that "there haven't been as many big deals coming through", due to the fact that "firms want to see what happens before committing to anything".
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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Despite these concerns, Manku is still relatively optimistic about the future of the post-Brexit trajectory of the industry, as "fundraising levels remain high and there is a lot of money left to deploy". The fact both venture capital and private equity are "attractive asset classes" in terms of returns will help persuade investors to keep putting in money whatever the outcome of negotiations. However, both investors and the BVCA are "concerned about the uncertainty over the final settlement". It is unrealistic to expect the industry to emerge completely unscathed from Brexit, so "it is likely that there will be some sort of negative impact".
One of the big issues for the UK financial sector as a whole is whether "passporting" will be retained in any trade deal with Europe. Passporting allows British firms to market their products across the entire EU. This is obviously particularly useful for venture capital, which relies on accessing funds from investors outside the UK. If passporting does disappear, funds will need to rely on the specific rules governing private placements for each of the 27 countries. Manku hopes that these national private placement regimes can cushion the blow, even if passporting is lost.
Overall, Manku accepts that some firms could end up moving operations to the continent. However, this will be a gradual process and will depend on what stage they are in the funding cycle. Funds that have already raised enough capital will stay in the UK for now. However, at some points most funds "will need to raise capital from European investors", and at that point they will considering moving. Even then, they are unlikely to move their entire businesses wholesale. A more likely scenario is one where they "set up additional offices in Europe", to the extent needed to get around any barriers.
While continued access to the European capital markets is extremely important for venture capital firms, it's not the only area of concern. Manku thinks that an open immigration policy could benefit the firms that venture capitalists invest in. Such a policy would involve automatically guaranteeing that EU citizens who are currently working in the UK could remain. Looking to the future, it would also involve allowing firms a relatively free hand in recruiting skilled workers. This is particularly vital for technology companies, whose success is primarily determined by the quality of their workforce.
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