You’re gonna need a bigger boat!

  • 4 minute read
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Through our recent conversations with management teams globally, we were reminded of the 1975 thriller “Jaws.” In it Mayor Vaughn exclaims “We need those Summer dollars!” as he grapples with the decision to close beaches during the summer high season. After having to deal with COVID restrictions, forced business closures, Delta variant scares and now Omicron, there was a strong desire among CEOs to return to business as usual.

We examined top line growth in the nearly 300 borrowers in our global Private Credit portfolio and observed a significant increase overall. The chart below looks at trailing 12-month revenue growth over the prior period (blue line) and trailing 3-month revenue growth over prior quarter (purple line).

Graph of KKR Portfolio Revenue Growth Rate %

As we can see, there has been a welcome and sharp return of spending by businesses and consumers. Furthermore, pent up demand has started to come through in order pipelines and inventory levels are returning to more normal levels.

However, this growth is occurring at a time of unprecedented levels of coordinated global monetary stimulus. This begs the questions: “Is it really safe to jump back into the water again?” We sense the presence of an inflationary threat swimming just below the calm surface that should compel credit investors to reconsider their allocations.

In this investor letter we plan to cover three brief topics:

  1. KKR’s inflation view;
  2. The impact of current price increases on borrowers; and
  3. Why, to quote Chief Brody in Jaws, “You’re gonna need a bigger boat”!