Monday Market Minute | Mar 08, 2021

Supply chain cracks emerge as a structural threat to private market portfolios

What Moved

What began as isolated shipping delays was becoming systemic. Lumber prices surged over 180% year-over-year, semiconductor shortages idled manufacturing lines, and container shipping rates from Asia tripled. Canadian developers reported construction cost escalations of 15-25%, compressing margins on projects underwritten at pre-pandemic input costs. PE portfolio companies in manufacturing and distribution faced similar pressures as procurement timelines extended from weeks to months.

Why It Matters

Supply chain disruptions hit private market investors through two channels: margin compression on existing investments and increased capital requirements for development-stage projects. For MIC investors, borrowers needing additional draws to cover cost overruns tested portfolio reserves. For PE investors, the EBITDA margin assumptions underpinning entry valuations were being challenged before the ink dried on deal documents.

Signal to Watch

The Bank of Canada's Business Outlook Survey, due later in the month, would reveal whether firms viewed supply constraints as temporary or structural. The distinction mattered enormously for inflation expectations and, by extension, the trajectory of borrowing costs across private markets.

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