Current Inflation Trends’ Impact on the Private Equity Market

Jason Colodne
4 min readJun 6, 2022

For months, inflation has continued to pose economic concerns.

During much of 2021 — and so far in 2022 — it remained high; inflation rates, in fact, reached elevated levels last seen in the 1980s during that time period, according to the Federal Reserve Bank of St. Louis.

As the Pew Research Center noted in October 2021, after the consumer price index indicated the annual rate of inflation in the U.S. had reached 6.2% — its highest level in more than three decades — a number of factors had contributed to inflation’s rise, including ongoing global supply chain issues, labor market upset, and the lingering effects of the COVID-19 pandemic.

Some of those elements have remained in effect.

Inflation Catalysts and Consequences

In November 2021, a Brookings Institute analysis concluded that because the increased consumer demand and reduced supply availability resulting from the pandemic had, in turn, had helped push goods-related inflation to an extraordinarily high level, in theory — when the vaccine became widely available and the COVID-19 health risk subsequently declined — spending patterns and the demand for goods presumably could be reset, potentially helping to improve inflation.

Supply availability, though, has continued to be problematic this year. The global supply chain pressure index initially indicated supply issues had eased between December 2021 and March — only to show they’d risen again in April.

The pandemic isn’t the only challenging factor the U.S. has faced in recent months. A May 2022 article in the Federal Reserve Bank’s Liberty Street Economics publication attributed the recent global supply chain pressure index activity to China- and Europe-related delivery times and a bump in airfreight costs from the U.S. to Asia — which may have stemmed from pandemic restrictions in China and the ongoing conflict between Russia and Ukraine.

With global unrest and other elements at play, inflation in 2022 hasn’t been ideal. As of early May, the personal consumption expenditures index, a closely watched indicator of inflation, was 6.6% higher than in 2021: an increase driven largely by higher energy and food prices.

However, while inflation has taken a toll on consumers’ purchasing power — and in some instances, their financial stability — dealmaking activity hasn’t been shut down.

The number of large global mergers and acquisitions deals was up 37% in 2021, and the total value rose 67%, reaching $5.9 trillion. Private credit financing has become an increasingly popular funding choice. Approximately 45% of private equity firms — 10% more than a few years ago — say a greater number of their deals now involve private credit financings.

Some estimates suggest the amount of private credit assets under management will increase significantly in the coming years, potentially growing by 73% to $1.46 trillion by 2025.

The high inflation rate doesn’t appear to have significantly hurt deals or private credit utilization; it has affected the private equity realm, though, in some of the following ways:

Private credit financing’s floating rate structure can provide some protection from inflation hikes and higher interest rates, for instance; it may also offer more beneficial terms than other types of funding.

As companies took on debt to supply liquidity as lockdowns affected business — and then quickly tried to meet the surging demand for services once the COVID-19 vaccine began to be administered — leveraged loan and high-yield bond values hit record highs in the first quarter of 2021, according to one analysis.

The middle market, in particular, experienced a larger number of private financing-related leveraged buyouts, with investors choosing that funding option over bank loans or high-yield bonds.

The rise in inflation hasn’t been limited to the U.S. A Pew analysis of 46 nations found that in 2021’s third quarter, the inflation rate was higher in 39 countries than in the third quarter of 2019, before the pandemic began.

As of mid-2022, it’s still unclear if the high inflation level will abate anytime soon. The Fed’s Federal Open Market Committee has reiterated plans in recent months to raise the target range for the federal funds rate in response. The FOMC has also left the door open for future increases to help reduce inflation.

Several private equity firm executives have expressed concern about inflation’s potential effect on investment activity and ranked fear of inflation as one of the top two developments that will have the biggest effect on the deal environment in the coming months.

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