Private equity firms are in suspended animation as they await the final shape of the Trump administration’s tariffs on U.S. imports. Their investment model depends on stable cash flows at portfolio companies. But with trade policy in flux, many are reluctant to act. At the same time, some see opportunity in firms whose valuations have dipped as a result of tariff-related business pressure.
“When the environment gets this unpredictable, with trade policies shifting week to week, PE firms usually slow down because they don’t want to buy into a situation where profits could suddenly fall because of new tariffs,” Wharton finance lecturer Burcu Esmer said in a recent interview on the Wharton Business Daily podcast. (Listen to the episode.) “In general, in the private markets, the sentiment is wait-and-see. The big question is: How long can they afford to wait?” Esmer is also academic director of Wharton’s Harris Family Alternative Investments Program.
The policy uncertainty affects more than just deal flow. PE firms need a reasonable degree of earnings visibility to confidently underwrite deals and assess valuation — inputs that shape investment planning, exit strategies, and fundraising success, Esmer explained.
Still, not all PE players are frozen. General partners (GPs), who manage the funds, are often more optimistic than limited partners (LPs), who provide capital, about investing through volatility, Esmer said. “Some GPs are pointing to the long-term nature of private equity investing. They say we can buy low when things are a bit crazy and ride out economic cycles.”
“When public markets are messy, private equity shines the best, in general.”— Burcu Esmer
Esmer noted “a lot of investment opportunities across both equity and debt” in the current environment. “When there’s dislocation, we often see opportunities to create value, if you’re patient,” she said. The current state of the stock markets is one in which private equity can stand out. “When public markets are messy, private equity shines the best, in general.”
The What-can-go-wrong Mindset
Meanwhile, PE firms are being cautious, but in a measured way. “They are modeling their downside scenarios, stress-testing potential investments, and running numerous what-if analyses around trade risk and economic risk,” Esmer said. PE firms are also working closely with trade advisers and legal advisers to stay ahead of policy changes, so that, when necessary, they can quickly adjust their strategies, she added.
PE firms do not shy away from risks or challenges, especially buyout firms, which use a lot of leverage to finance their deals, Esmer noted. “The PE mindset is all about thinking about what can go wrong.” But more than anything else, they want clarity. “They need to know what the playing field looks like,” she explained. “Once the rules are clear and stable, they can model the risks, price them into their deals, and just move on. It is the constant change that is the bigger problem.”
“Once the rules are clear and stable, they can model the risks, price them into their deals, and just move on. It is the constant change that is the bigger problem.”— Burcu Esmer
Drawing from that mindset, the scenario forecasting at PE-backed firms is also around that idea of “what can go wrong,” Esmer said. In the near term, they are pricing in the expectation of tariff changes in their input costs, she noted. Firms are also carefully reviewing their contracts in detail, and trying to make changes if necessary.
For portfolio firms at PE-backed firms, the biggest challenge is to find ways to stabilize earnings as costs increase with higher import tariffs, Esmer continued. Firms in industries such as manufacturing, industrials, and consumer goods take a direct hit to their margins from higher tariffs. Many companies try to pass on the higher costs to their customers, but with that they also risk losing market share to rivals, she added.
As firms plan out more longer-term moves, they are considering relocating their supply chains around tariff-friendly countries. Supply chain reconfiguration is a costly endeavor, and it can mean “delays, inefficiencies, and extra renegotiation costs,” Esmer said. “When companies move to new international suppliers, they can face logistical hurdles and higher shipping costs.” The lucky ones may be firms that relocated their supply chains from China and elsewhere back to the U.S. during the pandemic, she noted.
