Inflation impacts and private equity, KPS scores 8.5x return amid surge in golf interest

KPS Capital is set to make 8.5x on TaylorMade Golf amid a surge in popularity

Happy Thursday!

What else is there to talk about but inflation? It’s the topic on everyone’s tongue.

We wrote last week about the potential impacts a sustained inflationary environment would have on private equity, and how GPs are factoring in those potential scenarios into their new deal calculations.

That was before the Labor Department reported that the consumer price index increased 0.8 percent in April, the biggest jump since 2009. The core CPI, which excludes food and energy, rose 0.9 percent from March, the biggest jump since 1982.

The debate now is whether this is solely a function of the reopening, or if there is more to these price gains, as government support floods the markets.

Private equity managers have to be able to look out three or five years or longer when they’re buying a company, with the fundamental question — can I sell this company for more than I buy it for today?

I’m interested in learning more about how inflation could affect the industry around issues like valuation of GP management companies and fundraising in general. We heard from Peter Martenson, partner at placement agency Eaton Partners, who said other strategies that act as inflation hedges could become popular with LPs.

“Oil and gas [are a] great inflationary hedge … because obviously oil rises with [inflation],” he said. “It’s the same with metal and mining or commodities. In those cases, we’ll see the investors that truly want to get into an inflation hedge directly for their overall portfolio. They’ll invest into those types of areas such as farmland, timberland, infrastructure, etc., because that is for all intents and purposes an inflationary hedge outside of its normal use as a product.”

Valuations: If the Fed chooses to raise interest rates to rebalance spiraling inflation, firms’ valuations could be in for a rough ride. Higher debt expenses (including working capital lines from banks), would decrease profits. Many firms calculate current value by projecting how much money the firm will make in the future (discounted cash flow). When future cash flows are hit by increasing interest expense, current value could take a hit.

Golf: KPS Capital is set to make 8.5x on TaylorMade Golf amid a surge in popularity, writes Karishma Vanjani on PE Hub today. Korea-based Centroid Investment Partners acquired TaylorMade in a $1.7 billion deal, around 4x its $425 million value in 2017, when KPS bought the company, Karishma writes.

Interest in golf started to surge after stay-at-home orders lifted, with an almost 14 percent rise in activity last year. Around 502 rounds of golf were played across the US last year, up from 2019, according to the National Golf Foundation.

Read more here on PE Hub.

That’s it! Have a great rest of your day. As always, hit me up with that good gossip, tips, feedback or whatever at cwitkowsky@buyoutsinsider.com or find me on LinkedIn.