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

Changing tariffs are dramatically reshaping mergers and acquisitions (M&A) and private equity (PE) transactions. As companies and investors strategize their growth and exit plans, understanding the interplay between international trade policy and deal dynamics is critical.

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. This cautious stance is particularly evident in sectors sensitive to trade policies, such as industrials and manufacturing.

Despite this uncertainty, certain sectors like technology, business services, and health care have shown resilience, continuing to drive deal flow. Distressed acquisitions and secondaries are emerging as strategic opportunities, allowing PE firms to boost operations and maintain profitability amid tariff uncertainties.

Valuations under pressure

Tariff policies are prompting a recalibration of valuations. This requires fund managers to adjust their valuation models in real-time, considering the potential impact on earnings and market conditions. This is especially crucial for companies in tariff-sensitive industries, where the cost of imports and exports can significantly affect profitability.

Extended holding periods are likely to continue as exit activity slows due to valuation gaps and tariff anxieties. However, this adjustment period also offers an opportunity for PE firms to enhance operational efficiencies and strengthen their portfolio companies' competitive edge.

Transaction dynamics

The dynamics of transactions are shifting in response to the new tariff policies. The anticipated increase in M&A activity driven by deregulation and tax cuts has yet to materialize. Instead, companies are focusing on accommodating tariffs and policy uncertainties. The aggressive tariff measures — including reciprocal tariffs and specific duties on imports from countries like China and the European Union — have created a challenging environment for dealmaking. These policies are influencing the repricing of deals and — in some cases — leading to suspended sale processes.

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.

Potential strategies for companies

To navigate the 2025 tariff policy changes, companies should consider:

Diversifying supply chains

Companies should explore alternative sourcing options to mitigate tariff impacts. This might involve shifting production to countries with more favorable trade terms or increasing reliance on domestic suppliers.

Tariff engineering

Adjusting product classifications and leveraging tariff engineering can help reduce tariff liabilities. This involves reclassifying products under different harmonized tariff codes to benefit from lower rates.

Enhance operational efficiency

Investing in technology and process improvements can help companies offset increased costs due to tariffs. Automation and lean manufacturing practices can enhance productivity and reduce dependency on imported components.

Strategic stockpiling

Building up inventory of critical components before tariffs take effect can provide a buffer against supply chain disruptions and cost increases.

Engage in advocacy

Companies can actively participate in industry groups and trade associations to advocate for favorable trade policies and seek exemptions or reductions in tariffs.

Financial hedging

Using financial instruments to hedge against currency fluctuations and commodity price changes can help manage the financial impact of tariffs.

How CLA can help with tariff impacts on deals

As we move forward, the clarity on U.S. tax and trade policy expected in the coming months will be crucial for shaping M&A strategies. Companies and PE firms must stay informed and agile, ready to adapt to the evolving policy landscape.

While the 2025 tariff policy changes present challenges, they also offer opportunities for strategic acquisitions and operational improvements. By understanding and navigating these changes, portfolio companies and private equity firms can position themselves for success in a complex and dynamic market.

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