As the war in Ukraine moves into its second month, private equity firms and investors continue to grapple with both the humanitarian crisis and a shaky business environment.
While most of the GP and LPs we have spoken to so far had little to zero exposure to Ukraine and Russia, the second-order effects of the crisis will be felt by the industry in the years to come.
London-headquartered buyout firm Pamplona Capital Management will liquidate every fund in which sanctioned Russian oligarch Mikhail Fridman’s private investment company LetterOne had an interest. Pension funds in the US, including the Chicago Teachers’ Pension Fund and New York City Retirement Systems, are withdrawing their public markets investments in Russia. They are also working with their PE managers to assess any direct or indirect exposure to Russia in their PE portfolios.
Consultant Bain & Co has developed a set of eight potential vectors of disruption through which the current crisis could impact the global business environment. These are:
- The loss of Russian market and assets
- Natural resource shortages
- Cascading supply shortfalls
- Mounting inflation
- Financial market instability
- Real economy slowdown
- Technological disruption
- Geopolitical realignment
According to Bain, companies that successfully navigate the crisis will act with urgency and take decisive actions, continuously recalibrating for uncertain situations.
Here are the key areas in which companies will need to respond and reposition.
Companies should also keep the following principles in mind.
- Focus on the business environment, and not too heavily on the geopolitical specifics
- The vectors of disruption are interconnected. Do not build scenarios in silos
- Factor in responses from companies, governments and individuals
- Monitor the situation carefully and be willing to update scenarios as previously hidden factors emerge
- Even the best forecasting will get things wrong; the ability to adjust quickly and to bounce back from shocks is vital