Supply chain delays, persistent inflation provide challenges, opportunities for private equity

Some PE firms learned that CEOs who showed a good combination of empathy and energy led their teams through the crisis, and the ones that showed too little of either really struggled.

One of the major challenges that emerged after the pandemic for private equity is the snarling of the supply chain, which for many firms makes sourcing parts challenging.

“It feels as though there is a new normal with supply chains and I am not so sure we won’t ever see the end of COVID-impacted supply chains,” according to a panelist at a recent conference.

“Inconsistent consumer demand signals have made it hard to predict any kind of meaningful revenue streams and severely disrupted supply chains cause significant issues for on-time delivery.”

A panel of PE executives at Private Equity International’s Operating Partners 2021 discussed some of the lessons that came out of operating during the pandemic, and the environment that has emerged as society gradually reopens. (The conference was under Chatham House rules, meaning the information can be used, but the speakers’ identities had to be kept confidential).

Supply chain delays could clear up by later 2022, another panelist said. “I think that by the end of Q2, Q3 of next year we will be reverting to the norm as far as supply-chain and delivery times,” the second panelist said. “And on the other hand, consumer demand has been and will continue to shift from durables to services in quite a significant way and that will continue.”

Supply chain problems, which is driving higher prices and escalating fears of persistent inflation, while challenging, also provide opportunities for business, one of the panelists said.

“Functionally, one of the things we found in our portfolio is that pricing has become a bigger opportunity than we had expected,” the panelist said.

“Pricing is hard to get after, as you need the right combination of analytics, senior support to drive successful execution and one thing we found in our portfolio is that over the last 12-24 months even companies where we thought we were doing well on pricing, we found more opportunity. It’s gone from being ‘nice to have’ to ‘you must do it’ because costs are going up everywhere.”

The panelist added that there has been a mindset change for high quality companies that provide a good product to keep pushing pricing, as consumers have changed their view on it. This is important for portfolio companies to be able to keep up with overall rising prices, but also it could indicate a psychological transition among consumer expecting higher prices, which helps to maintain inflation.

“Our experience on companies across all sectors is that we are getting something like 200 or 300 [basis points] in year one and then see in excess of 500 [basis points] in year two.”
Another panelist said there was another seismic shift in the business world during the pandemic.

“I think we moved from a buyer-employer world to a supplier-employee world and not sure how long that is going to last but very different for most of our CEOs who grew up in a different era,” the panelist said. “Also, during COVID, we were forced to adapting to having to make good decisions quickly and we learned a lesson: a good decision implemented today, is better than a perfect decision implemented in three months.”

The panelist added that the market is in a period now that at least for the next few years, the skills learned during COVID are going to benefit companies that move ahead in the future.

“I don’t think we are going back to an era of stability, from 2009 to 2019, nothing really changed and then suddenly everything changed,” the panelist said. “CEOs that showed a good combination of empathy and energy, led their teams through the crisis very well and the ones that showed too little of either one, really struggled.”