VC investors need to heed the warning signs

Nicolai Tangen, chief executive of Norway’s $1.3tn oil fund, is pessimistic, for one. That is a real worry considering that he is the public face of the world’s largest sovereign wealth fund. Speaking to the Financial Times he said investors face years of low returns, warning that inflation could become a permanent feature of the global economy. He went on to say that he is “the team leader for team permanent” in the debate as to whether the jump in inflation would be transitory or longer term.

Runaway inflation?
The case for the prosecution is that consumer price inflation is running at its highest level for more than two decades in the world’s big industrial economies. The annual pace of price growth hit 7% in December 2021 in the US, up from just 0.1 per cent in May 2020. The concern is that the world is experiencing high demand and continued disruption to supply chains. Ikea, for example, is increasing prices by 9%, food prices are rising, while the global business ecosystem continues to see high freight rates, trucking rates, metals, commodities (timber was up 23% in one month last year), energy, and gas prices soaring

Not all economists are so pessimistic over whether the rise in inflation will be here to stay. Some argue that the pandemic caused only a temporary shock to supply chains that is coinciding with a robust economic recovery, so inflationary pressures will ease over time. One popular gauge, the 10-year break-even rate, shows inflation moderating from today’s levels to roughly 2.5%, says the FT, while the two-year measure indicated inflation would remain just above 3% in the near term.

Good times for VC
2021 was a turbulent year by any standards but it provided very high returns for investors willing to embrace risks despite new coronavirus variant fears and the uncertain monetary policy environment. In 2022, the market continues breaking records while venture capital has been a significant beneficiary of ultra-loose monetary policy boosting the supply of available capital.

Although inflation appears to be gathering pace, the impact on entrepreneurs raising investment is unlikely to be felt immediately since funds have considerable dry powder, according to Forbes magazine. Remote and hybrid working that has been necessitated by Covid-19 and its variants are causing fundamental shifts that will have major, often positive repercussions for the venture capital sector. As Forbes explains, the “rise of globally distributed teams and the technology required to underpin them will be a key driver of growth in this space next year.”

Tech and admin support
The move away from full-time employment to a more flexible freelancer model is gaining more approval from the C-suite, HR and business owners. That provides an opportunity for businesses with a good track record of enabling companies to create the optimised infrastructure for this liberated freelancer economy with all the ancillary services needed to support it.

As Crestbridge reported at the end of last year, the COP26 conference in Glasgow showed us that a space is opening up for venture capital to fund companies that can enable change and help businesses and government to meet the world’s ambitious “net zero” targets. The investment community is embracing ESG policies that should result in more investment flowing to ClimateTech companies next year. The launch of the Climate 50 offers further evidence of this snowball effect.

Supply chain disruptions
Labour shortages are feeding into the 2022 inflation narrative as are current supply chain disruptions that have been causing sleepless nights for logisticians, operations directors, and their CEOs. Global supply chains are a bit of a mess. This growing supply chain challenge opens up the potential for companies that can leverage cutting-edge technology to implement actionable insights generated from real-time big data analysis.

This is, of course, a trend that extends across all lines of business globally as the power of data analytics comes to the fore. For AI, don’t just see the words artificial intelligence, but also see the trend towards alternative investment. As the FT reports, “large investors have sought to beef up returns with ‘alternative’ investment strategies, including hedge funds, venture capital and real estate.” Assets under management in these alternatives grew to $13.3tn in 2021, potentially growing to $23.2tn by the end of 2026 according to data provider Preqin.

Michael Johnson is group head of institutional services for Jersey-based fund administrator Crestbridge.