Are we looking at a Post-Globalized World? (Part 1)¹

In the early days of the pandemic, investors and CEOs often talked about a “return to normal.” But as the impact of COVID-19 persists, new geopolitical crises arise and supply chains remain disjointed, it's apparent that a new normal is setting in.

This new normal is shaped by the cracks beginning to form in the old global order. Component shortages slow production, ports remain overwhelmed and political risks reshape policies. A new world of risk has emerged in this environment — one that's forcing some investors to re-assess opportunities that are overly reliant on international supply chains.

At 10 East, we continuously discuss these trends with our sponsors to understand the impact they see and how their strategies have adapted. In recent conversations, we've heard three significant themes being repeated.

Production Pains

Most, if not all, of us have felt ruptures in the global supply chain as consumers. Products are back-ordered, options are limited and delays are increasingly common. Much of this pain is driven by a slowdown in global production. Specific problems like the chip shortage impacting cars and electronics have dominated the headlines, but the reverberations are broader.

“There's a lot of attention on the big manufacturers,” said the president of a lower-middle market private equity firm we invest with. “But it's important to look at tier-2 and tier-3 companies, too. Many of these lack resources to navigate these shortages and find alternatives, but their delays then impact the tier-1 brands they sell to.”

Overwhelmed Ports

Exacerbating these production delays are the growing delays across ports around the world. As we see Chinese ports struggle with COVID lockdowns amidst increased demand for containers, a backlog is growing and the impacts could be enormous. Our sponsors are seeing low throughput and fear the issue could last for months or years, not weeks. “Demand might slacken because of these issues and ongoing inflation, but the challenge of getting the component you need is not going away soon,” said one private equity sponsor.

Ships Waiting to Load or Discharge at Shanghai

Political Pressures

The pressures facing companies today go beyond the supply chain. Geopolitical tensions have been ratcheted higher and affect long-protected supply chains and trade relationships (most notably, sanctions on Russia are driving up energy costs and disrupting food supply).

But we also see U.S.-Chinese relations reshaping information security and the future of technology. Policies curbing interest in Chinese technology can limit access to capital and create new risks to a company's growth. “Geopolitical risk — and opportunity — is a critical lens that we must assess every company through,” said the founder of a longtime growth capital partner of 10 East. “There are always new challenges, which can shift an entire industry.” As we look ahead, we see the shift away from globalization as a slow-moving pendulum. As this shift continues, where do investors see opportunities that mitigate — or capitalize on — this trend?

In our conversations with sponsors and portfolio companies, we're hearing a growing shift towards domestic investments. Companies are bringing production to the U.S. and homegrown start-ups continue to scale.

In our next article, we'll explore the opportunities we see in this new American moment.