European stock indexes fell further in early September, the euro dropped below 99 cents for the first time in twenty years and European gas prices surged after Russia said its main gas supply pipeline to Europe would stay shut. We are in an energy crisis.
Germany announced earlier this month around $65 billion of support to help protect Germans from the rising costs. Finland and Sweden also announced plans to offer liquidity guarantees to power companies. Finland’s economic affairs minister warned of the possibility of a “kind of a Lehman Brothers” in the energy industry, referring to the 2008 collapse of what was then the fourth-largest U.S. investment bank. Eurozone government bond yields rose, with Italian 10-year yields heading towards 4%. The ECB has approved one of its highest big rate hikes to combat inflation.
The energy crisis is significantly influencing the (European) public markets and the private markets. When European SMEs are experiencing higher costs by heating their factories, plants, and offices, due to the sky-high gas prices, profitability is under pressure. This will be felt especially in the industrial sectors. Public and private markets have been interconnected in history. When public multiples and valuations drop, it is also seen in the private markets. In addition, a weaker euro means a lower USD valuation. Private (and public) European companies can be an easier M&A target for US companies. This can potentially stimulate cross-border M&A as well as European export.
Partly due to the energy crisis (and inflation, rising interest rates, geopolitical developments and normalizing technology developments) the multiples and market caps have declined. While valuations have been going down to more normal levels, this might be the perfect timing for private market investments.
The longer horizon of private market investments will potentially be the perfect match for exiting the assets after the energy crisis has ended. Note though, that valuations can continue to decline over the upcoming winter.