The US private equity (PE) market has hit a speed bump. Tariffs and ongoing market uncertainty have slowed deal activity to its lowest levels in a decade, particularly in tariff-sensitive industries like industrials and manufacturing. While many investors are hesitant to take on new risks, some see an opportunity to capitalize on overlooked assets by strategically leveraging trade policies.
A cautious start to the year due to tariffs
According to recent market data, US deal volume in sectors affected by tariffs has significantly declined.
But what's the main cause?
Buyers are increasingly wary of the US trade policies and their growing unpredictability. The challenge of forecasting how these new tariffs will impact corporate earnings and with policies shifting rapidly, pricing any equity deals accurately has become increasingly difficult.
Senior PE firms say it’s really difficult to reprice a deal right now based on what's happening with tariffs because it seems to be changing on a daily basis.
A deal that didn’t materialize: a real world example
One clear example of how tariffs are reshaping dealmaking comes from a middle-market PE firm that walked away from a promising deal late last year. The PE firm was in talks to acquire a Canadian pet food company but instead decided to pass on the opportunity mainly due to their concerns about potential tariff risks. The uncertainty of the tariffs surrounding trade regulations made the deal too unpredictable and resulted in a lack of confidence.
High-risk sectors are being hit the hardest
Other investors are echoing similar concerns too and avoiding deals where tariff exposure is significant, especially where the uncertainty is high enough not warranting the underwriting risk right now.
The silver lining: Opportunities amidst uncertainty
While many PE firms are proceeding with caution, some investors are looking at the current market landscape as an opportunity for growth and investment. By identifying assets early that may be undervalued due to tariff concerns or deals that are deemed unpredictable, these firms aim to unlock additional value in businesses that others might overlook. For those willing to navigate the complexities of trade policies, this period of uncertainty due to tariffs could provide a competitive edge in dealmaking.
As the market continues to evolve, it remains to be seen how firms will adapt to the shifting regulatory landscape. But one thing is clear: in private equity, uncertainty isn’t always a dealbreaker, it can also be an opportunity.
