Headwinds continue to build for businesses as inflation, rising interest rates, and economic uncertainty reshape markets across Europe. While these pressures create immediate challenges, they are also accelerating changes that many organizations had already begun and exposing new opportunities for businesses prepared to adapt.
Volume two of “The Inflation Shift” examines how inflation is changing the outlook for private equity and the banking sector, exploring how investors and financial institutions can respond to a rapidly evolving macroeconomic environment.
How inflation is changing private equity
Inflation is creating immediate challenges for private equity funds. Higher interest rates, uncertainty around economic growth, and concerns about recession are increasing the cost and reducing the availability of financing for mergers and acquisitions. At the same time, portfolio companies are facing rising costs for goods, energy, and labor, putting increasing pressure on margins.
These conditions are forcing difficult decisions around procurement, automation, capital expenditure, and pricing strategies. Passing higher costs on to customers can be particularly challenging in consumer-facing sectors, where disposable income is being squeezed by rising energy prices and higher borrowing costs.
Successfully navigating this environment will require private equity firms to actively manage portfolio performance while responding to rising costs, tighter financing conditions, and changing market dynamics.
Why inflation could drive more companies into private ownership
For some listed companies, the current environment is creating a scale of transformation that may be better managed outside the public markets.
Private equity firms have the ability to drive significant operational and strategic transformation while taking a longer-term investment perspective. Combined with depressed public market valuations, this could create opportunities for a new wave of take-private transactions across Europe.
For companies facing significant change, private ownership may provide greater flexibility to focus on long-term value creation while navigating today's macroeconomic challenges.
Inflation is changing commercial and central banking
Banks are entering an inflationary environment unlike the one that has shaped the industry over the past decade. Although many institutions have strengthened capitalization, governance, and business resilience, most current banking executives have limited experience leading through a sustained period of higher inflation.
Commercial and central banks will therefore need a new toolkit to navigate this changing environment.
For commercial banks, priorities include managing increased credit losses, rising operating expenses, and the impact of higher interest rates while protecting long-term customer relationships.
Banks will also need to develop credit strategies for sectors most affected by inflation while supporting industries expected to benefit from investment linked to national recovery plans and broader economic resilience initiatives. Institutions that move early may be better positioned to support economic recovery while strengthening their own competitiveness.
Preparing for a range of inflation scenarios
Given the uncertainty surrounding inflation, organizations should prepare for a range of possible economic outcomes rather than planning around a single forecast.
Building resilience will require leaders to remain flexible, monitor changing market conditions, and adapt strategies as the economic environment continues to evolve.
Inflation is accelerating business transformations that many organizations had already delayed. As businesses respond to today's economic pressures, they also have an opportunity to strengthen resilience for the future. Future editions of “The Inflation Shift” will continue exploring how public and private organizations can adapt their operating models, improve production and consumption, strengthen ESG thinking, and transform their organizations to meet a changing economic landscape.
Originally published in June 2022.