Doing Business in Europe Post-Brexit - Considerations for U.S. Investment Managers
On October 5, 2016, the UK Prime Minister, Theresa May, announced the UK’s intention to trigger the withdrawal mechanism of Article 50 of the Lisbon Treaty (“Treaty on European Union”) by the end of March 2017. The Prime Minister raised the prospect of the UK leaving the EU by Spring 2019 in what is being termed a ‘hard’ Brexit. Pre-negotiations between the EU and the UK to agree the terms of Brexit will now begin in earnest although no official negotiation will take place until after Article 50 has been triggered.
The Prime Minister also intends to expedite the process of leaving the EU by passing a piece of legislation called the Great Repeal Bill. This historic proposal aims to end the EU's legal supremacy in the UK by converting all EU requirements into British law as soon as Britain exits the EU.
The purpose of this article is to provide an overview of some key considerations relating to Brexit for U.S. investment managers, both in the short-term and long-term.
Brexit Considerations for U.S. Investment Managers
- EU Investment Opportunities and Challenges
Brexit will impact the position of UK and European investors, as well as the investment environment within the EU, leading to both investment opportunities and challenges. Hedge fund managers are already preparing for investment opportunities created by the UK’s decision to leave the EU. Since the UK’s vote to leave, the British pound has fallen to a 31-year low against the U.S. dollar, thus creating significant market volatility. Press reports also indicate that Marathon, a $13 billion U.S. hedge fund, is building a big Brexit trade, increasing its investments in property across Ireland, France, Germany and the Netherlands, in a bet to be among the big beneficiaries from companies departing London over the coming years.
- U.S. Investment Managers with UK Operations
The impact of Brexit for U.S. investment managers with UK operations will depend on the UK entity’s tax status and regulatory position. Particular points for consideration include:
- Tax structuring
Post-Brexit, access to benefits available under tax treaties and EU based exemptions such as the Parent - Subsidiary Directive available to EU-based portfolio companies owned by UK entities may be lost. Identifying, over the coming months, which fund investments may suffer tax leakage as a result of these changes and developing appropriate contingency plans will be crucial.
- EU passporting rights
Passporting rights currently allow UK financial services entities to operate across Europe. A key consideration for U.S. investment managers with UK operations is whether its UK entity makes use of, and will continue to require, EU passporting rights. In this regard, the head of Prudential Insurance’s M&G fund management arm, Anne Richards, said they are considering shifting more funds to Dublin and Luxembourg as a result of the Brexit vote to maintain access to the EU’s single market.
- U.S. Investment Managers Marketing Cayman-Domiciled Funds in the EU
For U.S. investment managers marketing Cayman-domiciled funds in the EU, it is unlikely that the Brexit decision will require fundamental changes to the way in which funds are marketed in Europe (given the managers’ existing status as non-European managers of non-European funds). For the time being, U.S. fund managers will continue to market in Europe and the UK using the National Private Placement Regimes. However, going forward, marketing in the UK may be regulated differently, as it may no longer be subject to the Alternative Investment Fund Managers Directive.
Ireland & Brexit
It is important to note that Ireland remains a full member of the European Union and the only English-speaking member with the euro as its currency. While there will be uncertainty and volatility, we expect there to be opportunities for jurisdictions like Ireland to provide market routes for global firms into Europe that have traditionally gone through the UK. Ireland is well placed to support the UK by providing and maintaining a route for UK firms to the EU marketplace with minimal interruption and low frictional cost.
The fact that the European Central Bank licenced the Irish supervisory framework for use in their Single Supervisory Mechanism is a strong selling point for the high regard in which the Irish regulatory system is held internationally. It has been reported that the Central Bank of Ireland is to split the organisation’s key markets supervision division into two units as it deals with a surge of enquiries from investment funds and firms following the Brexit referendum.
Additionally, fears of a “hard” Brexit have led to a spike in the number of UK-based people seeking jobs in Ireland. In the 100 days since the June referendum, UK searches for jobs in Ireland on Indeed.com, the world’s largest recruitment site, have risen by 20%. “We now see that the increase in people looking at jobs outside the UK post-Brexit is both sustained and increasing,” said Mariano Mamertino, economist with Indeed. “As the only English-speaking EU member, with the fastest growth rate and flexible labour markets, Ireland is well placed to attract these labour flows and potentially additional foreign direct investment.”
Benefits of Doing Business in Ireland
Ireland is an open and agile economy that has been responsive to the needs of international players for more than half a century. Companies establish operations in Ireland to serve local, European, and international markets, and in doing so leverage Ireland’s advantages as a gateway to these markets. These advantages include:
- A stable political environment and respected regulatory regime;
- Membership of the European Union;
- The only English-speaking jurisdiction in the Eurozone;
- A low corporate tax rate - corporation tax on trading profits is 12.5%;
- An extensive double tax treaty network;
- A common law jurisdiction, similar in nature to that of the U.S. and the UK;
- Availability of fiscal incentives for R&D activity;
- Strong international broadband and transport connectivity; and
- Supportive legal and economic environment for internationally trading businesses.
Businesses impacted by Brexit are beginning to develop their plans for the new reality of a European Union without the UK. For U.S. investment managers, it is timely to consider potential threats to their European business models and also emerging investment opportunities and to develop appropriate strategies to mitigate these threats and capitalise on the opportunities.
Ray Kelly is a partner with EisnerAmper Dublin and Brian Hillery is a partner advisor.
Asset Management Intelligence - Q4 2016