For most of us, 2022 has been one macro crisis after another: first, supply chain issues sparked by the covid-19 pandemic were worsened by Russia’s invasion of Ukraine in February. Sanctions imposed against Russia then impacted energy supply lines, resulting in skyrocketing costs. Next, swelling inflation drove many central banks to up interest rates, triggering a major cost of living crisis. 

Due to the lag between public and private markets, alternative assets have managed to escape these crises for some time – now, though, things are starting to catch up.

As of the second half of 2022, the US-based National Bureau of Economic Research notes we are not quite in recession territory yet – though the UK’s economy did shrink by 0.2 percent in November, marking the potential start of an economic downturn. The Fannie Mae Economic and Strategic Research Group, meanwhile, forecasts that a recession will officially begin in the first quarter of 2023. 

As we slip deeper into this challenging environment, GPs will need to be increasingly prepared for the hardships that may come their way.

“The two biggest disruptors are geopolitics and inflation. Those undoubtedly in my mind are the two biggest near-term disruptors,” says Ignacio Jayanti, chief executive of Corsair Capital. 

“We’ve seen now with the invasion of Ukraine how a unilateral action by a country to take military action against a neighbour can be disruptive to the global economy. I’ve read estimates where I think economists are thinking that the cost of the Ukrainian conflict [to] the global economy could be in the trillions of dollars.”

Opportunity meets emergency 

The long-term nature of private equity does provide a buffer of sorts against crises such as these: public markets began slipping immediately following the news of the Russian invasion, while private equity continues to enjoy relatively strong financial results. According to Private Equity International’s most recent quarterly fundraising report, PE funds brought in $516.9 billion in the first three quarters of 2022 – the second-highest figure for the period on record.

“Macro uncertainty [and] equity-markets uncertainty typically creates, on a long-term basis, some of the best opportunities for private equity,” says Ivano Sessa, managing director of private equity at Bain Capital. “[There] are typically moments in time where there is a wider gap between current performance and full potential… [PE firms can] identify that gap, create the right conditions to close the gap and then go and execute and fundamentally create much better businesses.”

In spite of these opportunities for growth, Sessa acknowledges that in periods of macro uncertainty, there is less leverage available for firms to play with, which must then be factored into valuations, risk return and potentially different capital structures. Private markets are not, it turns out, immune to the same challenges that other asset classes face.

GPs cannot be complacent in these times, nor should they become reliant on their public market lag to protect them from aggressive headwinds. In this deep dive, the PEI team examines some of the key ways GPs are tackling these challenges. 

With untold disturbances likely waiting around the corner, only the most forward-thinking fund managers will successfully protect their operations against further disruption.

– Graham Bippart, Robin Blumenthal, Mary Kathleen Flynn, Craig McGlashan, Andy Thomson and Chris Witkowsky contributed to this report.