Inflation in the UK rose 2.1 percent in May year-on-year, according to data from the Office for National Statistics published Wednesday. In the US, investors are awaiting the conclusion of the Federal Reserve’s two-day policy meeting today.

For private equity – a long-term asset class known for its agile method of ownership – how are managers planning to deal with expected rising costs? How do they expect their portfolio companies and deals will be impacted over the next 12 months? What kind of impact would a sustained inflationary environment have on returns, and how would this impact fundraising plans?

Private Equity International put the above questions to some of the world’s biggest private equity firms to gather their thoughts on inflation. Here’s a selection of what some of them said, including comments from recent earnings calls.

Blackstone – Jonathan Gray, president and COO

I think it’s the major risk that’s out there today. We and I think a lot of others believe the economic recovery will be quite strong, which should fuel positive revenues. We’re seeing that in our portfolio, and positive earnings. But, the question is around inflation pressures and multiples.

Our response to that is to try to buy businesses that are in these good neighbourhoods, that have real tailwinds, that can grow to offset what could be some multiple pressures. You see that in obviously tech and life sciences and global logistics. But, then in this quarter, we talked about a big push into the covid recovery travel play, which we did in a number of businesses around the world. We talked about sustainability, an area where obviously there’s a lot of capital flowing in, and opportunity, as we electrify the grid and try to clean up the planet. Housing is another area we like a lot. We bought a business that does furnishings for single-family homes, or finishes, I should say, for single-family homes. We’ve done a lot of rental housing in our real estate business.

What we’re trying to do is position ourselves for things that look and feel as least bond-like as possible. People worry at times, real estate, concerns around that. Yes, if you own a 20-year flat leased office building, that could be concerning. But if you own multifamily apartments, where you’re resetting the rents every year, and there’s a tonne of job creation and household formation, you can capture the benefits of growth. That’s how we’re trying to prepare ourselves for what we do think will be a higher inflationary environment.

From Blackstone’s Q1 2021 earnings call, 22 April

EQT – Christian Sinding, chief executive

Like everybody in our industry, we’re looking at it from 360 degrees both from a long-term perspective, what’s happening with our clients and their investment strategies, we’re looking at all our companies – how they may be impacted, and also how financing structures can be impacted. The types of investments we make, we’re growth investors in the industries that are non-cyclical typically and having strong secular growth trends. So, we’re not that concerned about inflation when it comes to the way that we deploy our capital.

Bain Capital – John Connaughton, co-managing partner

We are taking a long-term view of asset quality and business resilience while focusing on the positioning of our existing and prospective portfolio companies’ ability to sustain margins through inflationary scenarios. While we recognise inflation causes some near-term pressures, our investment approach remains unchanged as we continue to pursue select thematic investments in companies we believe are long-term winners.

Partners Group – Adam Howarth, managing director, head of portfolio management Americas

One of the things we focus on is the pricing power of the businesses we buy, should the company need to raise prices – it can do so without damaging the demand for its products. We’re very focused on investing in growing, market leaders which have the pricing power to offset some of these rising costs. 

In addition, we are very active in scenario testing our underwriting and constantly challenge our investment and management teams to re-evaluate previous assumptions to ensure we understand what impacts – whether labour, or otherwise – the business might face and what the plan to navigate this impact might be. We are active, entrepreneurial owners of our investments and that means we are able to adjust, as needed, to the challenges ahead of us. 

In the near-term, we think inflation will remain elevated, but for the mid- to longer-term, we believe inflation dynamics are more complex. There are good reasons why inflation could either move higher or lower again beyond 2022. 

That being said, private equity is a long-term asset class and allows us to take a long-term lens – there is always some sort of macroeconomic or geopolitical disruption to consider, be it inflation or a change in administration. 

At the investment or asset level, we complete robust scenario testing that informs us of potential impacts of different environments and we are able to develop plans that we are comfortable will generate outcomes in line with our expectations. 

From the fundraising perspective, there is an increased demand from investors who are looking for transformational investments in their portfolios. Not only have we seen strong demand for single strategy closed end funds, but also increasing demand for open-ended evergreen funds and bespoke solutions that often are multi-asset class and multi-strategy. These are often more flexible with their investment guidelines and can apply relative value views to a portfolio, and opportunistically make investments that would otherwise be challenged by a current headwind. Investors understand there are cyclical challenges to investing in private markets, but need help to overcome these challenges and capture additional alpha through portfolio construction across the cycle.

MBK Partners – spokesperson

We do not see significant rising costs but if so, we can mitigate its impact on portfolio companies by passing on the increased costs to customers. We expect minimal impact on our returns and fundraising plans.

Bridgepoint – Guy Weldon, chief investment officer

We target companies which enjoy market leadership and benefit from pricing power and therefore are well placed, in the event of a period of longer-term inflation, to pass on price rises.

We actually think any period of higher inflation will be transitory rather than structurally more permanent, linked to the rapid re-opening of economies and release of pent-up investment by companies and households. We target companies which enjoy market leadership and benefit from pricing power and therefore are well placed, in the event of a period of longer-term inflation, to pass on price rises.

Our long-term track-record shows consistent returns through economic cycles including pre-GFC when the world operated with higher inflation and higher interest rates. In any case, all of this is to some degree dependent on the policy response by central banks, ie, will interest rates rise significantly from current historic lows? A sustained period of higher inflation won’t necessarily compress our returns: although significant interest rate rises could push up the cost of servicing debt by portfolio companies and constrain overall debt/EBITDA affordability or leverage levels, this wouldn’t particularly impact Bridgepoint because leverage isn’t a big driver of our returns.

Bridgepoint is owner of Private Equity International parent company PEI Media

ICG – Benoît Durteste, chief executive and chief investment officer

Judging by experience – which may or may not be the right thing to do – we’ve done well in higher inflationary environments. There are a number of reasons for that. One is strong companies tend to do well in an inflationary environment because they tend to be able to pass on increased costs and sometimes more. Strong companies tend to do well and better – there’s greater differentiation in an inflationary environment.

Annual results call, 8 June

– Carmela Mendoza, Rod James, Michael Baruch, Alex Lynn and Adam Le contributed to this report.