Navigating a high inflationary environment

Author: Bobby Dormanesh

After decades of falling interest rates and increasing multiples, fund managers need to remain diligent in today’s increasing rate and inflationary environment. Whether inflation is here to stay or not, fund managers are having to consider the potential flattening out of valuations and costing changes impacting their portfolio companies.

How does increasing rates impact fund managers?

As rates increase, so does the cost of capital, potentially decreasing valuations. To maintain returns, fund managers are needing to take a deeper look into their portfolio company investments and find ways to be predictive rather than reactive. For a successful portfolio optimization strategy, fund managers are harnessing the power of information to hone in on investments based on their needs. Supporting and continuing to optimize portfolio company operations can offset the cost of capital being taken into consideration by future buyers.

How does increasing inflation impact portfolio companies?

Supplier price increases are already coming down the pipeline. If you’re not getting ahead of the problem, it might be too late. Now, more than ever, it is imperative that dealmakers stress test the vulnerability to higher inflation. Similar to the technology investments made during COVID-19, portfolio company investments in operational improvements will help drive continued EBITDA growth.

How we can help:

CLA has a team of industry specialized individuals that can help you navigate today’s environment. At the fund level, we can help you gather information, provide insight into what we are seeing in various industry verticals, and help you triage your portfolio. We are ready to walk alongside your portfolio companies to evaluate cost pressures, implement variable pricing in contracts, and evaluate the company’s segments and customers.