War in Ukraine: The private equity industry takes a stand

Consequences will be a stress test for the PE industry – supply constraints and financing costs

Whether it has been a matter of ethics or “simply” economic calculation, the numbers are clear: if – at all – any of their portfolio companies has done business in Russia, the majority of private equity companies have prompted them to sell or cease these activities. Only a small minority hold companies in their portfolios with exposure to Russia and have actively opted to continue these activities. This is the result of the most recent FINANCE Midmarket Private Equity Monitor.

The industry magazine FINANCE, in conjunction with Deutsche Beteiligungs AG (DBAG), regularly conducts an anonymous survey amongst investment managers of 50 mid-market private equity houses on their current market assessment – most recently in the second half of May. The main question this time was how the Russia-Ukraine war is affecting private equity – and how the industry deals with the war’s consequences. Fewer PE houses than usual have responded – maybe to avoid positioning themselves when confronted with such a delicate question? Two key hypotheses have emerged from the survey results: the German PE industry is taking a stand on the war in Ukraine – but unlike during the COVID-19 pandemic, their business is set to suffer severely from the war’s secondary effects and presumably also for the longer term.

Exposure to Russia has been scaled down
How does this manifest itself? The investment managers were asked how they are dealing with their portfolio companies’ exposure to Russia. The result is clear: almost half of the funds (48 per cent) have prompted them to sell or cease business in Russia, even though that can cause write-downs. After all, the impression is that undesired Russian business activities are mostly being sold for a symbolic price rather than for a significant sum – economic and compliance risks are just too high. But there are also investors who have not yet made a decision: 16 per cent of the surveyed managers indicated that their portfolio companies continue to maintain business relationships with Russia, but have not done anything yet to sell these business units. A small number (three per cent) of funds still have companies with Russian exposure in their portfolios, and have actively opted to continue these business activities.

A reason why private equity investors hold on to their Russian business activities despite all could be that their share of the overall portfolio is insignificant – and that selling these activities would be too much of an effort. It also shows, however, that for investors in private equity funds it is not (yet) overly important whether revenues generated by the portfolio companies are not realised in Russia or together with Russian business partners.

For DBAG, continuing business with Russia is not an option, although the management boards of its portfolio companies (and their advisory boards if applicable) have the final say. “It is our conviction that a continuation of the status quo is inconceivable. We have recommended to our portfolio companies that they conduct a comprehensive review of their individual business activities in and with Russia. This decision is not least in line with our commitment to take the principles of sustainable action into account in our business policy,” Torsten Grede, Spokesman of DBAG’s Board of Management, says.

Even financial investors without any exposure to Russia in their portfolios are dealing with this issue: almost a fifth (19 per cent) of the surveyed funds have replaced Russian suppliers with suppliers from other countries, even if that meant accepting higher purchase prices. Almost a third (32 per cent) of the surveyed investors appear relatively sanguine concerning the situation – at least with regard to the war in Ukraine. They said that none of their portfolio companies are conducting business in Russia, and that they therefore feel no direct impact of the war on their own portfolio.

Supply chains remain a challenge for almost every investor
While the question on how to deal with business in Russia has been answered by many financial investors, the war’s secondary effects are now moving into focus. And investment managers have to fight on several fronts, with additional supply bottlenecks being the most serious issue. 87 per cent of the surveyed private equity managers are facing supply chain problems.

The crux: the supply constraints are not only due to the war, and would have persisted anyway. Moreover, the situation has been worsening for months – with no end in sight. “Supply chain stability has been a challenge since the beginning of the pandemic. In this respect, the market is already experienced in dealing with it. However, the situation has become even worse. The war in Ukraine and related sanctions as well as the renewed lockdown in China are causing more disruptions,” Mr Grede observes. He believes that it will take some time for the companies’ reactions to take effect.


Therefore, especially financial investors with a significant share in companies from the manufacturing industry are taking action to stabilise or relocate their supply chains to keep production going.

The second factor to hit the private equity industry is the increase in financing costs, which represents a challenge for more than half of the surveyed managers (55 per cent). Market observers have spotted increases of far more than 100 basis points for standard financings – and expect prices to increase even further in the coming months, if inflation continues to rise.

However, the financing market is not locked: only ten per cent of the surveyed managers said that they had experienced difficulty in obtaining financings for their transactions. This should mostly concern riskier financings – or financings in industries that are currently avoided by lenders, such as the automotive industry, or sectors with traditionally high production rates and therefore high energy costs.