The Impact of Trump's Tariffs on Private Equity Firms, Portfolio Companies

Private equity (PE) firms are no strangers to navigating uncertainty. President Donald Trump's recent tariff proposals have added another layer of complexity to investing.

These tariffs, aimed at addressing perceived unfair trade practices, have significant implications for PE firms and their portfolio companies. Here's how the industry is adapting to these changes.

Understanding the impact

The tariffs primarily target goods, but there's potential for expansion into services. This uncertainty is causing a ripple effect across various sectors, influencing mergers and acquisitions (M&A) activity, supply chain decisions, and overall investment strategies.

M&A activity

The uncertainty surrounding tariffs is leading to a more cautious approach in mergers and acquisitions. Deals are taking longer to close, with extended due diligence periods and more stringent conditions. PE firms are incorporating earnouts, contingent payments, and changes to material adverse effect clauses to mitigate risks.

Valuation adjustments

Companies heavily reliant on international trade are facing pressure, leading to discounted valuations. Conversely, businesses less affected by tariffs may command premiums. This dynamic is reshaping the landscape of potential investment opportunities.

Supply chain reconfiguration

PE firms are advising their portfolio companies to reassess their supply chains. This includes evaluating the jurisdiction of suppliers and the location of production lines to reduce tariff exposure. Multinationals are also documenting and justifying changes in pricing methodologies to navigate potential scrutiny from revenue authorities.

Strategic adaptations

PE firms are adopting several strategic measures:

Enhanced due diligence

With the heightened uncertainty, due diligence processes are becoming more comprehensive. Firms are scrutinizing potential investments more closely, considering the long-term implications of tariffs on business operations and profitability.

Flexible deal structures

Incorporating flexibility into deal structures is crucial. This includes earnouts and contingent payments based on the tariff impact. Such measures help align the interests of buyers and sellers while mitigating risks associated with tariff changes.

Proactive risk management

PE firms are actively monitoring policy developments and engaging with trade and legal professionals to stay ahead of potential changes. This proactive approach allows them to adjust strategies swiftly and effectively.

How we can help with PE assessment of tariff impact

While Trump's tariff proposals present significant challenges, they also offer a chance for PE firms to demonstrate their resilience and adaptability. By staying informed, adopting flexible strategies, and proactively managing risks, the industry can continue to thrive in this complex environment.

At CLA, we work with PE firms to help them adapt to these changes, leveraging our mutual specialization to help to navigate the challenges and seize opportunities that arise. Contact us to help assess your future plans.