The UK votes to leave the EU and concern spreads throughout both its technology companies and the investors backing them. So went one argument made by ‘Remain’ advocates prior to the referendum, and not without justification. London corporate finance in particular is expected to be effected, but to what degree?
Fears about the potential consequences of a Brexit on British tech companies did not, after all, translate into a catastrophic fall in investment into these businesses in the first half of 2016. M&A activity in this area of the UK mid-market continued at a steady rate, within the wider context of a global slowdown relative to 2015’s record-breaking levels. In fact, those areas of the Communications, Media and Technology (CMT) sector currently in particular vogue – notably FinTech, software, and enterprise comms – seemed almost immune to the political risk. Only in June did we start to witness a conscious deferral of deals by buyers until after polling day.
Given the apocalyptic rhetoric that surrounded much of the referendum campaign, this may seem difficult to explain. After all, an ‘Out’ vote threatened to pull up the drawbridge in a way inimical to the increasingly borderless nature of the global technology industry and throw up barriers to the recruitment of the highly-skilled continental Europeans heavily represented across the workplaces of British start-ups. But the global drivers of investment in the CMT sector proved to outweigh the short-term impact of the threat of Brexit.
Now that the UK has voted to leave the EU, we are faced with a new paradigm of British companies trying to attract cross-border investment whilst headquartered definitively outside of the European Union. Brexit previously only weighed on M&A volumes as a threat; now we will discover whether an actual departure from the EU will prove an immovable object before the irresistible force of investment into the global CMT sector.
In all likelihood the greater issue arising from Brexit will be attractiveness to VC investors, rather than access. A company whose exports to continental European clients become subject to the imposition of tariffs is a less investible proposition. But again there’s a flipside: 40% of the company’s sales in 2015 came from the American and Asian markets, while a substantial proportion of the 60% accounted for by Europe is likely to have come from the UK. Moreover, the World Trade Organisation, whose established standards will represent the bare minimum for Britain’s replacement trade agreements, liberalised tariffs on semiconductors and other next-generation IT products in 2015 through an expansion of its long-standing Information Technology Agreement.
Financial Technology, or FinTech, is the subset of the CMT sector in the UK for which the potential consequences of a Brexit received the most extensive public airing, by virtue of how these companies’ fortunes are closely tied to those of the financial services sector. The prognosis was bleak. London owes its position as a global leader in FinTech in part to ease of access and its position as the world’s foremost financial hub. Accordingly, the supposed post-Brexit shift of financial services operations from London to Paris or Frankfurt was predicted to have a negative knock-on effect on its ‘enabling’ technology suppliers – if less so their ‘disruptive’ counterparts.
Brexit will have a detrimental short-term impact on UK CMT companies and their investment prospects. But what risked being lost in debates about new trade barriers and regulatory systems was that much of the investment into the sector globally is driven by ongoing, fundamental changes in how we work, behave, and live. Thursday’s vote will not affect these underlying drivers. When tech companies and investors in the sector come to reflect on Britain’s departure from the EU referendum, it will be better thought of as a speedbump rather than a roadblock.
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