How today’s economic rebalancing is impacting PE

In this episode, the speakers discuss how macroeconomic factors such as inflation, monetary policy, and the labor shortage will impact PE investment decisions and theses.

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The global economy is slowing yet inflation is rising, an unusual combination reminiscent of the 1970s when high inflation was exacerbated by an energy price shock. Inflationary pressures are rising worldwide due to fiscal stimulus in the US, energy prices in Europe, and supply constraints in Asia. Commodities prices are rising and so are consumer prices, creating a dilemma for businesses as to whether they should pass on higher costs to consumers or take a hit on their margins to preserve market share.

Talent will be worth a lot in the coming years as the global economy rebalances and establishes a “new normal.” The ongoing labor shortage is inspiring employees to leverage their increased bargaining power to secure higher salaries, better employment terms, richer benefits, and greater work flexibility. In turn, businesses are seeking to offset rising input costs and higher labor costs with digitization and automation. When evaluating the potential of a business, PE investors are factoring in whether companies have the right talent mix to face such an uncertain environment.

The US Federal Reserve is expected to tighten monetary policy rapidly by raising interest rates and shrinking the size of its balance sheet to regain control of inflation. This will have both negative and positive implications for PE: while the rising cost of credit will make capital more expensive, there will also be less competition for deals which could lead to downward pressure on valuations.

These seven gauges will indicate how much PE activity will take place in the coming year:

  1. The positioning of a company in its sector
  2. Whether the sector is positively or negatively impacted by inflation
  3. How much pricing power does a company has
  4. A company’s ability to pass on higher input and labor costs
  5. The price at which a company is acquired considering the higher cost of credit due to higher interest rates
  6. How resilient a company is in this economic environment
  7. The long-term value potential of a company and the type of value it brings

For your convenience, full text transcript of this podcast is also available.


Episode 48