Q2 2022 PitchBook Analyst Note: How Inflation, Monetary Tightening, and Volatility Are Impacting PE and VC

How inflation, monetary tightening, and volatility are impacting PE and VC

Inflation is running much higher than the Fed’s target of 2.0%, the US central bank is raising short-term rates, and market expectations for further tightening are climbing. This has caused substantial market turmoil in recent months, with most major stock indexes down by double digits since the start of the year.

These dynamics, along with supply chain constraints and geopolitical factors, have caused a decline in valuations and a rotation away from stocks with high implied growth rates. Performance of recently public VC-backed companies suggests a difficult-to-ignore disconnect between private and public markets. If these market shifts persist, and expectations for more Fed tightening are borne out, interest coverage ratios for buyout deals will fall, suggesting leverage or valuations in future deals will need to come down. 

In our most recent analyst note, we further highlight that our current modeling suggests around a 20% chance of a US recession in the coming 18 months. 

The most likely economic scenario is one in which supply constraints improve moderately and the Fed is able to engineer a soft landing. The next most likely is a deflationary recession in which the Fed hikes rates enough to stymie demand and drive down growth and prices. An inflationary recession–stagflation–is the least likely, but still a tail risk deserving attention.