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Churchill’s Randy Schwimmer on inflation and PE, Big pension shops large PE portfolio

How will inflation affect PE deals?

Happy Monday!

This is Chris, on the Wire today for MK. What’s the word out there??

I almost never talk about sports on here, but just let me say, that game last night between Kansas City and Buffalo was one of the best I’ve ever seen. I could care less about either team (my Steelers are in a long decline), and still, that was one for the ages … Not to mention the Fall of Brady.

Anyway!

MK has a Q&A today with Randy Schwimmer, co-head of senior lending at Churchill Asset Management, on the outlook for private equity this year with inflation and potential rising interest rates.

Here’s a selection from the interview. Read the full piece here on PE Hub:

How will rising interest rates affect PE-backed loans?

Interest expense is always the first item to be impacted, which in turn compresses interest coverage ratios for borrowers. But a rising rate environment is often prompted or accompanied by higher economic growth. Improved revenues and profitability will then offset any higher borrowing costs. The 2022 outlook for Fed rate hikes, though, only gets you to a 1 percent Fed funds rate – which pales in comparison to June 2007’s 5.25 percent level.

How will inflation affect PE deals?

This is very industry- and cycle-dependent. And even with sectors, each company has a different cost profile. Where are they in the supply chain? How do they source product? What’s the labor component of their cost structure? How exposed are they to energy or commodity increases? We look closely at a borrower’s ability to pass along these costs to the customer.

Big portfolio: A theme we’ve been tracking in private equity secondaries is the return of large traditional LP portfolio sales as big institutions take advantage of the rich pricing environment to sell off stakes in funds.

The biggest process, an example of sellers’ ambitions to use secondaries to sort out their portfolios, is one run by CalPERS, which wants to sell up to $6 billion of its private equity portfolio.

Another large process in the market is being run by Dutch pension administrator APG, which is selling a more than 2 billion euros chunk of its holdings. Read more here on the sale.

Deal of the Year: Get your nominations in now for your best exits (either full or majority) that closed in 2021. Awards are given in seven categories: overall deal of the year, large-cap, middle-market, small-cap, international, turnaround and secondaries. Deadline is Friday, Feb. 11. Send to Chris Witkowsky, private equity editor, at cwitkowsky@buyoutsinsider.com. Go here for all the rules and regs!

That’s it for me! Hit me up with tips n’ gossip, feedback or just to chat at cwitkowsky@buyoutsinsider.com or find me on LinkedIn.