For four decades, companies have optimised their capital structures and supply chains. The goal was to maximise shareholder value creation by limiting investment, encouraging share buybacks and operating with the lowest possible levels of inventory and equity, by relying more on debt.
However, the COVID-19 pandemic and subsequent geopolitical tensions have revealed the shortcomings of an overly optimised model. Therefore, building resilience has become a priority over efficiency in business objectives: producing closer to the consumer, increasing the resilience of supply chains, securing against cyber, climate and operational risks, and operating with higher levels of equity, inventory and strategic reserves. However, this strategy comes at a cost: resilience and sovereignty are built through investments in capital goods (CAPEX), focused around the four "D"s: Defence, Decarbonisation, Digitalisation, and Deglobalisation.
This CAPEX is financed through a combination of public borrowing (via significant fiscal expansion) and private capital. For example, in the field of artificial intelligence, it is primarily private capital that finances the construction of infrastructure. Therefore, the push towards resilience increases the need for companies to raise capital. Consequently, they are likely to increasingly turn to listed and private markets: large capital increases (in 2026, Google executed the largest capital increase in the history of a listed company), stock issuances and IPOs, large volume bond issuances, a greater convergence of private debt towards the investment-grade universe, and large private equity transactions, both in primary markets and through continuation funds.
This has three main consequences. On one hand, a steepening of the yield curves, accompanied by a monetary policy as accommodative as possible and significant fiscal expansion. On the other, the need for asset allocators to adapt their investment policies. Finally, a structural change in value creation within private equity.
The increase in the steepness of yield curves
The reflationary environment is not solely a response to the energy crisis arising from the war in Ukraine and subsequently exacerbated by tensions in the Persian Gulf. As we have just noted, deglobalisation and building resilience involve costs, lower efficiency, and are inflationary. A massive fiscal expansion is also inflationary, as is the adoption of more restrictive immigration policies. The deflationary effects of artificial intelligence (AI) have been fully anticipated, but in the short term, the investment needs in AI are driving up the prices of electronic components, electricity, and even water.
Finally, the weakness of Asian currencies (RMB and JPY) had been masking these inflationary pressures, but the recent appreciation of the RMB is mitigating this deflationary factor for the global economy.
What do these long-term interest rate increases imply for risk assets?
In equities, both listed and private equity, the expansion of multiples will be more difficult going forward, and value creation will depend more on profit growth than on the increase of valuation multiples and debt refinancing.
It is worth noting that, due to an unprecedented reflationary environment since the 1970s, sovereign bonds are not currently performing their traditional role as a safe-haven asset that they have played for decades.
