Inflation & Private Equity: Impacts & Mitigation Tips

Private equity activity hasn’t been as strong as of late – and with ever-changing inflation rates, transactions become even more difficult to manage as businesses struggle to make decisions regarding valuations, funding and more.  

As experts in helping businesses conduct successful private equity transactions and reducing the complexity of the process, we’ve outlined some helpful information for how inflation impacts private equity – and what you can do to mitigate its effects. 

How Inflation Impacts Private Equity 

1. Rising costs & higher debt 

Inflation affects how much businesses will have to pay for any loans they receive, the economic landscape and the price of assets on a global scale. This in turn changes how businesses are able to spend their money — and whether or not they have enough available funds to be attractive to a private equity firm. 

Private equity firms want to go after businesses that have a steady cash flow, signaling their ability to pay back any debt they’ve accrued. With loan rates increasing, higher borrowing costs and a reduction in a company’s ability to pay back the funds they receive, expect to see the number of private equity transactions continue to decrease in the coming months. 

2. Lower business valuations, less investments and fundraising opportunities 

Due to higher costs and an increase in debt, there will also be lower valuations for businesses. 

Lower valuations mean trouble for businesses looking for external investments, and fundraising will become a challenge as investors turn to fixed income streams and other securities. This, too, will likely cause a decline in the number of private equity transactions in 2023. 

How to Mitigate the Harmful Effects of Inflation on Private Equity

1. Work to understand how inflation impacts your business

Understanding how inflation impacts your business is essential for developing the right strategies and plans for mitigating its harmful effects. Pay close attention to how inflationary shifts affect your supply chain and inventory, labor costs and more while keeping a close eye on CPI changes and consumer spending habits.

By utilizing the right tools and technologies, you will be better able to measure the effect of inflation and develop plans of corrective action, such as increasing your prices or applying for a business loan.

2. Prioritize information gathering and documentation  

During periods of inflationary changes, it’s vital to prioritize financial information gathering and documentation, including any loans you’re paying back (or loans you’ve given out) and where the money is being allocated so you can develop a concrete plan of action for securing a steady cash flow – no matter how much rates may change.  

3. Review current contracts 

Reviewing client and customer contracts and taking note of their expiration dates allows you to better evaluate pricing metrics, potentially freeing up some additional funds in preparation for a private equity transaction.

4. Focus on operational enhancements by turning to a trusted partner for growth 

With lower private equity activity, now is the perfect time to take a step back and focus on any operational enhancements. Whether that looks like automating certain business processes, implementing a new system or turning to offshore labor, it can be beneficial to turn to a trusted partner to help you identify the best path forward. 

The right partner will act as an extension of your business in analyzing your operations to provide recommendations for improvements and working with your high-level executives, investors and private equity firms to prepare your business to be sold for a profit. 

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