By Nick Adams
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A last-minute trade deal evens the playing field for global companies in finance.
The United Kingdom and the European Union finalized a three-year negotiation period in 2020. On January 1, 2021, EU policies and international agreements, as well as a trade deal and terms of future co-operation were announced as the UK left the EU Single Market and Customs Union.
Though the last-minute deal allowed both parties to sidestep an undesirable no-deal, it generated complexities and compliance issues to which all companies must adapt.
Firms with portfolio companies in the EU and UK are impacted differently than those located outside the Single Market. The latter may benefit from decreased barriers to entry to the UK, or conversely, may suddenly need to set up shop in an EU country to continue operations as normal. If your portfolio firms are U.S. or Canada-based for example, Brexit may be an unexpected opportunity to compete on level footing with EU companies for a place in the UK market, but your operating partners need to be clued up on hiring and entity-setup in new markets.
On the bright side, expansion-stage companies in the finance sector may benefit from the fact that they are now on an even footing with EU companies doing business with or in the UK — now that the EU no longer has preferential access to the one million citizens employed in the UK’s financial sector.
How should your portfolio companies adjust post-Brexit?
The UK-EU trade deal was not announced with guaranteed results on how financial services and private equity will be affected. While the details are ironed out, your portfolio should prepare for:
- An increase in export paperwork: Companies in the UK will no longer be spared the red tape when shipping goods or services to EU countries, and vice versa. Even companies not based in or trading with the UK may find this slows their own processes while directly impacted vendors and partners expand their teams to meet new requirements.
- Slower solutions that open the door to competition: If your portfolio companies, especially those in the fast-moving financial sector, cannot maintain velocity in spite of increased paperwork, they may see local competition spring up.
- Economic headwinds caused by a pandemic-induced recession: Market demand tends to take a dip during recessions and become more price-elastic. Your portfolio companies may have to compete on price, which was not previously a major differentiator in the finance sector.
- Financial instability or increasing debt: Movement of essential financial services workers is already limited due to Covid-19 restrictions and replacing these people temporarily may have come at a cost to your portfolio companies. A drop in demand alongside increasing operational costs inevitably converts “business as usual” into nothing more than wishful thinking.
More will become clear after March 2021 — the date set by the UK and EU to agree on a Memorandum of Understanding, which establishes the framework of financial services. “For financial services firms — one of the UK’s biggest exports — the end of the Brexit transition period is just one milestone. Key policy work is still to be done both in the UK and the EU, and so, in many respects, the waiting game continues,” the UK Chancellor told EY. But now is not the time for a major industry to be complacent.
This year, Private Equity firms should apply a little more handholding than in previous years for their portfolios. Swift risk assessments, preparation for business uncertainty, and assurance plans for concerned stakeholders are key to survival in the finance sector. Before and after the Memorandum is released, Brexit will inevitably change the way companies in the UK and EU operate, and patience will not be a virtue in 2021.This year, Private Equity firms should apply a little more handholding than in previous years for their portfolios. Click To Tweet
What are the unique opportunities for Private Equity firms as a result of Brexit?
Boston Consulting Group cites Private Equity as a potential source of stability in the employment and recruitment services sector, despite the barriers Brexit poses to employee mobility. Many companies reacted to the Brexit-imposed end to the freedom of movement, as well as the Covid-19 pandemic, by freezing hiring. Private Equity firms have an opportunity to inject capital into restaffing their portfolio companies, taking advantage of a larger-than-usual talent pool and diversifying geographically in the process.
Building value into a company during crises is not a new concept. But intentionally widening the recruitment net to new markets might not have occurred to your portfolio companies, and they could be missing an opportunity. Brexit’s impact may be mitigated if operating partners use the remote-first mindset, which knowledge-based and financial companies adopted in 2020, as a springboard to distant talent markets.
There are competitive advantages to having international teams. Nonhomogenous teams are smarter and give leadership visibility into unexplored markets. This may lead your portfolio companies to expand their client base, and explore less costly talent hubs around the world rather than limiting hiring to the Single Market, both of which build versatility into their business.
How can Private Equity firms set their portfolios up for strategic growth post-Brexit?
For investors, adopting and executing a remote-first mindset, and then impressing this on portfolio companies is crucial. By encouraging operating partners to go where the talent lives, you will be broadening their choice of top candidates and potentially cutting their overheads with salaries in lower cost jurisdictions. There’s no longer any need to stay put in one country or be held back by evolving regulatory decisions.
With the help of an Employer of Record, expansion-stage companies can test new markets and transfer employees compliantly during international M&A transactions. This solution also mitigates risk of exposure to costly fines and penalties and allows busy leaders to hand over the responsibility of navigating the financial red tape of international expansion.
Any employee evaluating whether to relocate as a result of Brexit can be retained by their company using a global Employer of Record. This applies to those who need to move to where they are legally allowed to work outside the UK or return to their home in the UK from an EU country. Should non-EU companies want to enter the UK market, this solution also facilitates rapid and compliant hiring without the need to set up an in-country entity.
Private Equity firms that team up with an Employer of Record like Globalization Partners are already seeing their portfolios forge ahead with international expansions, improved pricing and low-risk market testing. Most importantly, portfolio company leaders that work with Globalization Partners are not weighed down by ebbing regulation changes, whether as a result of Brexit or not. We provide a firm-level framework and white glove service, so your portfolio companies can focus on growing their business.