What the Ukraine War Might Mean for Private Equity?

March 15, 2022

On February 24th, the 2022 private equity outlooked changed – by a lot.  What does it mean for the 2022 outlook? Let’s take a brief look.

Importance of Russian and Ukrainian Economies

Although neither Russia nor Ukraine has large, globally influential economies (neither are in the Top 10), business activity matter, especially for certain industries, such as oil & gas and wheat. Overall, the Russian economy accounts for about 1.73% of global output while the economy of Ukraine accounts for about 0.19%. The following figure depicts the relative size of the Russian/Ukrainian economies compared to all other economies. Relatively small.

Source: IMF, Econometric Studios

How Might the Russian Invasion Impact the Global Economy and Private Equity in Particular?

Although the economies of Ukraine and Russia are relatively insignificant on a global scale, the problems created from the war could cause significant disruption to private equity (PE) markets and global economic growth. Here’s a look at some of the areas where the effects of the war may show up.

Private equity investment activity in both Ukraine and Russia will freeze. As no surprise, the war in Ukraine will freeze private equity activity in Ukraine and Russia, perhaps for a very long time for Russia. Although it is difficult to ascertain, this may mean a direct halt in private equity activity of around 0.5% of all global PE activity. Not massive, at least from a direct perspective, but the indirect could be much larger.

PE deals will face more scrutiny around the origin of their investments. Given the rise in sanctions on the Russian aggressors, any PE firms with ties or exposure to Russian money, via general or limited partners, could result in complications through sanctions and seizing of assets. Although not all Russians are subject to the sanctions, Russian limited partners may result in both commercial and reputational challenges.

Bank transfers will get more complicated. With a growing list of Russian banks booted from the SWIFT payments system, combined with the drop in the Russian Ruble, Russian limited partners may have difficulty making their margin calls.

Political due diligence will take on a much greater responsibility. Legal restrictions stemming from the war are one thing but dealing with touch points connected with Russia and Ukraine will take on more scrutiny.

 Price increases will become more pronounced. Given the importance of Ukraine and Russia for the wheat and oil & gas industries, among others, inflation will be higher everywhere. Food inflation around the world may surpass 20%. These will slow global growth.

Summing Up

The 2022 private equity outlook has flipped on a dime from one of potentially recording breaking volume and deals to one that may be more consistent with a global recession. Time will tell.

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