• Hakki Mustafa

Private market prospects in a post-pandemic world

As economies around the world bounce back from their pandemic-induced slowdown, fresh challenges have emerged. With growth constrained by a lack of demand at the outset of the pandemic, growth is now being crimped by global supply issues, fuelling higher inflation around the world—a trend that is not going to be as transitory as some people had initially hoped.

“We see a stronger case for an extended period in which supply struggles to meet global demand and inflationary pressures persist,” says Dr. Michael Spence, Chairman of General Atlantic’s Global Growth Institute, writing in a March whitepaper.

That supply-side squeeze has underscored the need for companies and countries to diversify their supply chains and reduce their reliance on single supplier models. The latest round of lockdowns in China two years on from the start of Covid-19 have only further highlighted those risks.

Some governments are taking steps to bolster their resilience to supply chain failures. For example, US President Joe Biden last year issued an executive order seeking to strengthen America’s supply chains to ensure ‘economic prosperity and national security’. One measure the US government has put in place is to create an early alert system to monitor for and minimise disruptions to semiconductor supply [1].

Geopolitical stress

Against a backdrop of pandemic-related issues, rising inflation and interest rates, conflict in Eastern Europe has further increased market volatility. These challenges have led to supply chain disruptions, resource scarcity, and a resulting commodity price surge, most notably in the form of energy and food prices.

Food commodity prices had already jumped by nearly a quarter last year—the fastest increase in a decade when adjusted for inflation, according to the United Nation’s FAO Food Price Index. In February, the index—which tracks the prices of meat, dairy, cereals, oils and sugar—was the highest since records began [2]. The International Monetary Fund says that will place the heaviest burden on the world’s poorest nations.


Macro challenges

These concerns have softened growth expectations. The IMF is set to lower its global growth forecast as a result of the conflict in Ukraine, having already revised its forecast lower in January due to a weaker economic outlook in the US and China. The IMF concludes that the war is going to cause a significant hit to the global economy and hamper the recovery from the pandemic, exacerbating inflationary pressures [3].

Investment implications

Geopolitical tensions combined with a shifting macro environment require investors to revisit asset allocation and adjust portfolios. Dr. Spence believes this will be reflected through lower valuations and heightened volatility. However, long-term opportunities driven by secular trends such as digital transformation and the clean energy transition are unlikely to be disrupted. These innovations are persistent, not transitory. They may even accelerate, Dr Spence says.

As countries adjust to the post-pandemic paradigm, private market investors could potentially benefit. Analysis produced by Morgan Stanley suggests that private market investments made after a crisis have historically generated strong returns for investors who are able to identify and access the right opportunities. Average private equity returns for post-crisis vintages are 68% higher compared to investments made in the run up to a crisis [4].

If valuations are likely to be lower amid the current market uncertainty, those conditions may provide opportunities for private market investors to capture higher returns, in line with previous post-crisis vintages.



 

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Footnotes


[1] https://www.whitehouse.gov/wp-content/uploads/2022/02/Capstone-Report-Biden.pdf

[2] https://www.fao.org/worldfoodsituation/foodpricesindex/en/

[3] https://www.imf.org/en/About/FAQ/russia-ukraine

[4] https://www.morganstanley.com/im/en-sg/institutional-investor/insights/articles/post-crisis-private-markets-investing.html

 

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