Inflationary pressure - what does this mean for PE in 2022?

For many businesses the first half of 2021 was characterised by ongoing pandemic management and optimism that vaccines would pave the way for a return to normality. The second half of the year has arguably been even more challenging. As economies began to unlock the long-tail economic impact of the pandemic started to reveal itself.

A headache-inducing combination of stuttering returns to normal working patterns, supply chain chaos, labour shortages, increases in taxation and rapid inflation across the board presented a worrying picture for business leaders. Combined with Government support measures winding down and, most recently, the emergence of new variants of Covid then the end of 2021 looks little rosier than its start.

For Private Equity these factors hit at a time of significant deal activity. The end of coronavirus-driven hibernation and the legendary 'dry powder' funds had in reserve meant deals went through the roof from late summer onwards. They have been at record levels throughout most of the year, despite high valuations, limited access to targets and understanding of normalised performance.

However, inflation presents a distinct set of challenges. With a potential impact of margin of up to 30% in some industries, are business plans and forecasts still accurate if the price of pretty much everything has increase dramatically? Are hedging arrangements masking the true impact of the problem and will the end of current agreements reveal some unpleasant surprises? And, are investment theses likely to stand if market conditions have changed so significantly.

In our latest PE Broadcast series we explore these issues and explore the inflation challenge that's likely to keep many businesses awake for the next 12 - 24 months.