Brexit: Much Discussed, Little Understood

Skadden's 2018 Insights

Pascal Bine Matthias Horbach Richard Youle

Katja Kaulamo (Frankfurt, capital markets): With structural and political change in Europe in 2017, the European capital markets industry was left in a state of uncertainty pending the final outcome of the Brexit negotiations. It remains to be seen how Brexit will ultimately affect the German economy in general and capital markets in particular. What is certain is that the U.K. financial service providers will lose their European passporting rights, hence banks and financial service providers will be required to shift their regulated activities to a European Union or European Economic Area member state in order to maintain access to the EU single market for financial services.

In the meantime, companies in the financial industry have started to draw their own conclusions from the negotiation progress (or lack thereof) and are preparing for upcoming changes. Even though Paris was chosen as the new location for the European Banking Authority, Frankfurt is likely to be one of the primary beneficiaries of Brexit-related changes. Leading players in the financial industry are leaning toward, or have already chosen to pursue, a significant increase in their presence in Frankfurt, strengthening the city’s position as a leading European financial center.

At the same time, the impact of the ongoing Brexit negotiations on the German business climate has generally been limited.

Europe Insights

Matthias Horbach (Frankfurt, corporate): That’s correct. Despite the political and economic challenges of Brexit, there is no clear evidence of it having a negative impact on current or future German business dealings. M&A activity remains strong, and recent surveys suggest that Brexit will not seriously affect the business landscape. The acquisition of Medisoft Limited by Heidelberg Engineering and the investment of Deutsche Bahn into the British startup what3words serve as good examples of continuing activity.

The U.K. referendum may have resulted in longer transaction processes, as the general legal and business environments are reassessed, and the possibility of delayed legislation to enact the terms of the U.K.’s exit from the EU has been raised as a potential obstacle ahead. However, transactions are still being signed and strategically important acquisitions are still subject to premium valuations.

Pascal Bine (Paris, corporate): The relocation of the European Banking Authority (EBA) that Katja mentioned is an emblematic victory for Paris. Paris is already the home of the European Securities and Markets Authority, meaning that the EBA will become the second European financial regulator in the French capital. Such a concentration will increase Paris’ role as a financial center and attract higher focus from the European financial community on Paris, potentially with some business and job relocations to the city. Beyond that, Brexit is not expected to have much of an impact on France.

Positive Outlook for European Capital Markets

Richard Youle (London, private equity): Ultimately, I think Brexit is much discussed and little understood — even in the U.K. Some businesses are actively pursuing alternative location strategies to move to jurisdictions with the most favorable tax and regulatory regimes, thereby minimizing the impact of a hard Brexit. On the whole, companies with a geographically diverse portfolio of assets don’t see Brexit as causing a wholesale downgrade of their businesses.

On the whole, companies with a geographically diverse portfolio of assets don’t see Brexit as causing a wholesale downgrade of their businesses.  

I do think, going forward, that funds will look to businesses with pan-European operations that have predictable cash flows and minimal currency risk. In short, international investors will be unlikely to pursue the U.K. market on a stand-alone basis in the short term, preferring a more international strategy.

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