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Jeremy Bell : « The rescue plans will not hamper the availability of liquidity to funds »

According to Jeremy Bell, business lawyer and associate at Ashurst in London, some firms are making sure that their euro deposits are in bank accounts located in strong Eurozone countries instead of accounts in weak ones.

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Next Finance: Investment funds seem to be setting up rescue plans meant to face a break up of the Eurozone. Can you confirm that this currently the case?

Jeremy Bell: To my knowledge, funds are not setting up specific plans to deal with a potential Eurozone breakup because they cannot predict the consequences or evaluate the possibilities of what will happen. Nevertheless, I have discussed this issue last week with a fund manager and some firms are indeed making sure that their euro deposits are in jurisdictions which will probably remain in the Eurozone instead of accounts that are in weak Eurozone countries. Si one of the latter countries leaves the Eurozone, it is possible that the euros will be converted to a local currency. There is the impression here and there that some fund managers are taking steps in that direction but I do not know to what extent. Beyond that, if something happens in the Eurozone, if countries get out or if the zone breaks up, a rescue plan will have to be set up very quickly depending on available information. We shall then know how to manage the situation.

Eurozone: How the City is bracing itself for the worst.

Within the large investment banks, special teams consisting of 10 to 30 people have been assembled in order to develop rescue kits designed to face all types of scenarios resulting from a breakup of the Eurozone.

How much time will be required to react?

Private equity firms should develop their plan very quickly. The main risk would consist in managing new potential exchange rates. They will have to find a safe way of doing it. For example, if an investment target is set in euros, with a euro commitment from the investors, there will not be any exchange rate issue. But if the investment target evolves towards another currency, such as the Greek drachma, problems will appear. Fund managers may have to ask investors for advice on the best way to manage a new exchange rate. Private equity firms will know how to respond very quickly since their teams are usually very reactive and flexible. Besides, they won’t have any choice.

Will the rescue plan be the same for all firms or will they take a differentiated approach?

This will depend on the currency in which their fund is denominated, where they carry out their investments and what happens in the Eurozone. European funds can be denominated in USD if their investor base is primarily located in the US and in that case the steps will be different than those of a fund denominated in EUR. In other terms, it will be a case by case approach in order to determine which measures must be taken. In the highly improbable situation of a Eurozone breakup, everybody will be trying to limit the consequences. That said, the functioning of a private equity fund works very simply as follows: investment withdrawal, fund placement, reinvestment and cash repayment to investors. This would include the possibility of a foreign exchange risk along with measures to be discussed with investors.

What signals can indicate that a rescue plan is effective?

Premature interruption in investments or investment suspension until stability returns. In a certain way, it could well be the very basis of the plan – wait and see – instead of a failure of the plan.

Where does the money for the rescue plans come from? What will be the consequences of this money being used to guarantee the security of the funds instead of being allocated for growth?

The main cost will be linked to the advisory and legal expertise according to Jeremy Bell. But in a broader sense, I do not consider these rescue plans as factors that can cause a drop in the level of liquidity available for the activities of funds. I simply hope that they will not stop while things get back in order. Of course, it is not good for the economic recovery. But we can also imagine these funds benefitting from those opportunities by positioning themselves to acquire undervalued assets

Has the Brussels summit (viewed as decisive by politicians but not as much by specialists) which took place at the beginning of the month calmed fears?

In the world of private equity, the effects of such a summit are not immediate. Time is required. The reality is that the private equity industry is expecting opportunities and the latter exist with or without the conclusions drawn at the summit. As far as Britain is concerned, I cannot see any potential effect since most of the funds are denominated in euros anyway. The fact that they are managed in London (even if London is not in the Eurozone) does not have any short or medium term effect.

Johann Harscoët , December 2011

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