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February 2, 2009

Will inflation hit private equity?

This is a copy of an old 10 Billion Mark coupon.
Ponder this extraordinary piece of paper (which is obviously no longer is in circulation). Use it as a reminder of the hyper-inflation of the 1920s in Germany. In those days, these sums were the cost of daily groceries.
Certain early childhood experiences stay with you forever and some of these can impact the way you look at money and finances. In my case, I've always been weary about the hidden loss of value from inflation due to my upbringing in Zambia and Zimbabwe. So, yes, the 1920s were very different times which hopefully never come back. But with the current economic climate, particularly in the epicenter of leverage and deficit spending i.e. US government and households, we should never loose sight of the danger of inflation.
Look no further than Zimbabwe where in 2008, a loaf of bread cost 1.6 trillion Zimbabwe Dollars. In short, various prices have come down and quite rightly so are now at much more realistic levels, but we should fear inflation much more than deflation.
Private equity has cash but is not coming into the market at valuations business owners want. This dance will continue for 2009.

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