President Trump’s tariff play poses a risk to private equity’s long-awaited recovery. If it veers off course, PE funds may remain trapped in a backlog of maturing assets longer, particularly those backing companies in the impacted industries.
Electronics, apparel and many other consumer goods, as well as manufacturing, agriculture and energy, are caught in the crosshairs of the president’s first round of tariffs.
The president agreed to delay his planned 25% tariffs on goods from Canada and Mexico for 30 days after the US neighbors promised to take steps to enforce border security. A 10% toll on Chinese imports went into effect Tuesday.
PE firms have historically held their investments for three to five years before exiting, but the average hold time has crept up in recent years. In some sectors threatened by tariffs, a significant chunk of PE investments are nearing the end of the standard holding period.
In the auto industry, for example, PE firms are sitting on 279 companies they have held for at least five years—that’s about 44% of all PE investments in this space, according to PitchBook data. The garment, electronics, food products and beverage sectors see a parallel trend: More than half of PE-backed companies have been held for five years or longer.
If additional tariffs eventually kick in, the exit timeline for some of these investments could be stretched even further.
A decrease in PE exits since 2022 has led to a slowdown in distributions for LPs and shrinking capital available for new allocations. Not until 2024 did the exit drought start to abate, driven by lower interest rates, a loosening credit market and, late in the year, positive momentum sparked by business-friendly policies promised by then-President-elect Trump.
Advisors are now concerned the president’s trade moves may delay further interest rate relief—a critical catalyst for a rebound in PE exits and dealmaking.
“Folks are a little concerned now that if inflation goes up because of tariffs, they might not see the interest rate reductions that they were anticipating for this year,” said Karl Roberts, a managing director at business consulting firm Portage Point Partners.
Last month, the Federal Reserve held off on lowering interest rates after three consecutive rate cuts in 2024. Fed chair Jerome Powell said the central bank was not in a hurry to lower rates.
There are also fears that tariff threats will hamper M&A activity by raising barriers for sellers and buyers trying to reach agreements. Buyers will likely take a closer look at the trade implications faced by targets, leading to extended due diligence. Buyers might seek more protective provisions such as earnouts, contingent payments and adjustments to material adverse event (MAE) clauses and indemnities, according to a January brief from the Canadian law firm Torys.
Businesses with supply chains deeply connected to Canada, Mexico or China may face discounted valuations. This will create a challenge for sellers under pressure to offload these assets and return capital to investors, said Hooman Yazhari, a partner at Michelman & Robinson.
The suddenness and potential ramifications of these tariffs have caught people off guard, even though some were put on hold.
“That will probably put a brake on the positive momentum,” Yazhari said.
Many in the industry believe that Trump is using tariff threats as a negotiating tactic.
“The fact that Mexico and Canada immediately came to the table and gave concessions shows that this is just a big poker game, and America knows what it’s doing,” Yazhari said.
But he warned Trump is playing high-stakes poker. Further rounds of such trade maneuvers could discourage investments in the US, as investors could grow hesitant to allocate more capital into an unpredictable US market, Yazhari said:
“Every time you play a crazy hand in poker, the other sides think, what will this person do next?”
Featured image by Comezora/Getty Images
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