Mid-market private company revenue growth in the Golub Capital Altman Index (GCAI) was 18% in the first two months of 2022, and earnings grew 9% in the two-month period year on year, with inflation creating headwinds for corporate borrowers. and margins are compressing further.
“The economy is still strong and nominal 18% year-over-year revenue growth is good, but it’s not great,” said Lawrence Golub, CEO of Golub Capital. “Earnings growth of 9% was closer to flat in real dollars after adjusting for the nearly 8% increase in consumer prices over the same period.”
“Rising input and labor costs are weighing on profitability, even in our portfolio of market-leading businesses in resilient industries. Demand remains robust and businesses will continue to adapt if inflation remains high,” Golub said.
By sector, GCAI’s consumer businesses posted the strongest profit and revenue growth in the two-month period, with EBITDA up 14.2% and revenue up 20.3% . The technology sector followed, with profits for these companies increasing by 9.4% and revenues by 18.7%.
Margin compression over the past three quarters “marks a reversal of the significant margin expansion during the recovery from the Covid lockdowns,” said Edward Altman, credit expert and co-collaborator at the index produced by Golub Capital.
Technology companies that improve business operational efficiency could benefit.
“While accelerating labor costs and employee turnover are headwinds for most businesses, they’re also an opportunity for technology companies that offer productivity-enhancing solutions,” he said. Altman said.
“Looking ahead, with the Fed on track to raise interest rates, likely substantially, over the next few quarters, our data suggests that investors would do well to prepare for a potential stagflation scenario. We will continue to monitor our data for early economic signs of recovery or recession.”
The GCAI tracks the quarterly revenue and earnings growth of more than 150 US private companies in Golub Capital’s loan portfolio. It is the first and oldest index based on revenues and profits of private companies in the middle market, according to Golub Capital.