We have waded through pages and pages of analysis of Brexit. We’ve heard the conference calls featuring retired UK politicians– although, given their inability to predict the election outcome, one wonders how much weight to put on their predictions of the follow on effects. We’ve read the macroeconomic forecasts.
After taking all this in, the only thing we know is that the pound has been devalued (our advice: book your UK vacation now). This has straightforward effects, which have been observed over many episodes in many countries. Devaluation will result in higher inflation (due to rising prices of imported goods), lower consumption, and higher exports (once prices adjust). Probably, this will lead to a short term recession, followed by a longer term expansion.
As a dollar-based private equity investor, this means that UK assets will potentially be a better value if we are buying, and a worse value if we are selling.
In the long run, we really don’t know what is going to happen. It is not clear that the UK will actually exit the EU, or may do so only on a symbolic basis, while remaining in effect a member (see Norway, for instance), or that the UK will even remain intact as one country. It is not clear if other countries will also try to exit the EU. Basically, we don’t know, and neither does anyone else. Of course, uncertainty extracts it’s own macroeconomic penalties.
This brings us back to our core investment thesis. Private equity, whether we are speaking of venture capital, buyout, or turnaround, is about the micro, not the macro. In all but the most extreme macro environments, there are businesses which can be grown or improved in some way, and the owners of those businesses have an opportunity to earn substantial returns as earnings grow.