Minneapolis, MN – AltAssets recently asked North Sky’s Managing Director, Tom Jorgensen, for his insight on how private equity firms can successfully prepare for and navigate 2022’s inflationary conditions and rising interest rates.
With 40-year record high inflation, the Federal Reserve is expected to continue to raise interest rates, thus impacting private equity portfolio valuations and investment multiples.
Through conversations with fund managers and portfolio companies in December 2021, Tom noted that a substantial majority of underlying portfolio companies were planning to implement material price increases in 2022 due to rising labor and input costs. While earlier price hikes in 2021 were accepted without much pushback, it is still too early to tell whether another round of price increases will go through without negatively impacting demand. In the meantime, the Federal Reserve is likely to raise interest rates to curb inflation. Notably, a rising interest rate environment translates to higher discount rates and lower company valuations in the near-term. We expect to see downward pressure on net asset values, particularly for early stage venture portfolios.
Already there are signs that inflation is negatively impacting M&A and IPO exit activity, including for PE-backed companies. Companies that were already well on their way to an exit may skate through, albeit with fewer buyers/bidders participating in the process. But Tom expects a lull in exit activity as buyers and sellers digest Q1 operating results and inflation data.
Tom also discussed how North Sky’s experience as a pioneer in the impact investing industry has equipped the firm with invaluable insight into the current wave of inflation. During the first wave of impact investing (2005-8), oil prices were increasing and alternative energy was gaining traction. The last time CPI increased by over 5% was in 2008 when gas prices spiked due to strong demand, tight supplies and geopolitical uncertainty. “We are now back in that zone. This can be a positive for impact investments.”
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About North Sky
North Sky Capital is a pioneer in impact investing in the United States. Now in its 22nd year, North Sky has deployed more than $1.1 billion across more than 125 impact investments on behalf of its ten impact funds. The Firm’s active investment strategies focus on impact private equity (secondary strategy) and sustainable infrastructure (direct strategy) that support positive environmental and social change and can deliver strong financial returns. The firm’s impact secondary funds provide liquidity solutions to impact funds, companies and investors across sectors within the themes of cleantech/climatech, sustainable food & agriculture, waste & water and healthcare. Based in Minneapolis with additional offices in New York and Boston, North Sky is one of the most active impact investment managers. For more information, visit northskycapital.com.