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Since the start of the pandemic in 2019, businesses have navigated a bumpy road comprising a short recession, government stimulus packages and high inflation rates. So, the question is what will 2022 look like for private equity investors? 

Morgan Stanley’s paper, “Investment Outlook 2022” predicts that 2022 will be crucial in combating the chaos caused by Covid-19.  Even though many investors are predicting that next year will continue along the same trajectory as the previous two, the smart money believes investors should prepare for periods of instability and inflation. However, the disruptive trends will deliver greater opportunities and growth in the future.

The article identifies three major global trends; innovation, deglobalisation and the acceleration of decarbonisation, which drive growth, resulting in more spending and greater productivity.

Digital innovations
Throughout the pandemic, businesses have needed to adapt and expand digitally in order to survive the disruption. This has resulted in substantial growth in the fields of AR, AI, cryptocurrency and fintech, which are predicted to continue.

Local supply chains
There has been a dramatic shift away from globalisation due to inventory shortages and increased animosity between nation states as a result of the pandemic. Particularly with regards to the US and China. Geopolitics, cybersecurity and obviously Covid, have been instrumental in driving the trend towards establishing domestic and local supply chains.

Sustainability
Over the last few years, the call for businesses to reduce their carbon footprint has become much more resonant. Many businesses have closed since 2019 and the new enterprises that have taken their place are under extreme pressure to reduce carbon emissions, which will impact upon costs and inflation.

Sustainable investment opportunities are the way forward according to the ICLG report, “2021 and Beyond: Private Equity Outlook for 2022”. The report identifies that when the pandemic hit in 2019, private equity fund raising and mergers and acquisitions were paused until the following year.  Global Private equity investment activity increased with larger deal values and the upward trajectory continued throughout 2021.

The report also notes that since 2020, there has been a sudden wave of investment activity with the focus on sustainable investment (Environment, Social and Governance) and that private equity investors are placing a much greater emphasis on the ‘allocation of risk’ than in previous years.

In Europe, there is pressure to establish common language and benchmarks for sustainability and to address ESG issues in the economy.  Also, in the USA, regulations have been hastily put in place to force organisations to be transparent about ESG disclosures. Political, public and corporate attitudes are hardening, putting pressure on public companies to disclose their ESG credentials and on private equity investors to adapt their portfolios to align with ESG investments.

As we start 2022, the residual geopolitical and public health issues mean that private equity investors will need to be vigilant and to adapt accordingly to navigate these turbulent times.