The Unintended Consequences (and Opportunities) of Trump’s Trade Wars: A Private Equity Perspective

But as the U.S. aggressively pursues new tariffs under the new Trump administration’s economic strategy, the global investment landscape is witnessing seismic shifts. Nothing, and no country, it seems, is outside of scope and retaliatory actions suggest that the impact will not be short lived. The Trump Administration has hinted that it is accepting of stock market volatility in pursuit of what it sees as its national interests, at least in the short term. But with this backdrop, are we facing a more prolonged period of trade tensions that will fragment global free trade principles?

Private Equity (PE) has played an increasingly significant role in global financial markets over the last quarter of a century and investor appetite remains very strong. But PE fund managers must now navigate an evolving terrain marked by heightened market volatility, shifting trade dynamics, and unforeseen economic consequences. While risks abound, those with strategic foresight and ample dry powder may find unique opportunities amid the chaos.

Direct impact of U.S. tariffs on private equity

The imposition of U.S. tariffs on key imports—ranging from steel and aluminium to semiconductor components—has created ripple effects throughout global financial markets. Private markets are not insulated from these effects and PE-backed portfolio companies in manufacturing, technology, and consumer goods now face higher input costs and compressing margins, forcing operational recalibrations.

In general, increased production costs will lead to a wave of strategic restructuring considerations, with firms exploring reshoring, alternative supply chains, and cost-cutting initiatives to mitigate the impact. However, the prolonged uncertainty surrounding trade policies will hamper investment confidence, delaying expansion plans and prompt portfolio reassessments.

Sector-specific PE exposure

Recent data underscores PE’s significant exposure to the sectors most vulnerable to trade tariffs:

• Manufacturing: The year’s start for sectors like industrials and manufacturing has dropped to decade lows with only 170 deals recorded so far in 2025 compared to 252 in the same period 2024[1]. This decline is partly due to growing uncertainty about tariffs, as dealmakers are increasingly cautious about taking on tariff-related risks. As trade policies remain volatile, many buyers are hesitant to engage in deals that could be impacted by changing tariff regulations.
• Technology: Software and technology services are particularly vulnerable in specific areas:
  • Semiconductors: Existing U.S. tariffs on Chinese semiconductor components introduced under the Biden administration have increased costs for chip manufacturers and downstream industries relying on advanced computing technologies. The Trump administration’s proposed changes to the CHIPS and Science Act, including potential tariffs on the semiconductor industry, have raised concerns about increased costs for consumers and potential hindrances to AI sector growth due to higher chip prices[2]. Additional tariffs hinted at under President Trump will be particularly concerning for AI startups, cloud computing providers, and automotive technology firms.
  • Hardware manufacturing: Companies producing laptops, networking equipment, and telecom infrastructure face increased costs due to tariffs on imported components. Anticipating tariff hikes in the aftermath of the U.S. elections, companies like Microsoft, HP, and Dell have been stockpiling Chinese-made electronic components and exploring alternative manufacturing locations to mitigate potential cost increases[3]. PE-backed firms with significant exposure to hardware may struggle to maintain profit margins.
  • Telecommunications and 5G: Restrictions on Chinese telecom suppliers and increased tariffs on network equipment have disrupted expansion plans for telecommunications providers. Telecom equipment manufacturers are facing significant challenges due to the tariffs, complicating planning and operations[4]. PE-backed firms in this space may face challenges in infrastructure rollouts and cost escalations.

While the broader tech sector is affected, Software as a Service (SaaS) companies and digital-first businesses remain relatively insulated. Many PE firms with technology exposure have leaned into software acquisitions, avoiding tariff-sensitive hardware businesses.

• Consumer goods: Although buoyant in Q4 2024 with twice as many deals announced (377) against the previous quarter[5]. Consumer goods remain exposed to the effects of tariffs, with beverages being a particular target at the moment. Add to this the cost-of-living impact of higher inflation from prolonged trade disputes will leas to increasing headwinds for the sector, impacting valuations and deal volume.
• Automotive: PE-backed deals surged by 85% in the U.S. and globally, driven by investor confidence in sectors like automation and capital equipment. The automotive sector also saw significant growth, with PE buyouts reaching $22 billion in the second half of 2024, a nearly 250% increase from the first half[6]. However, the sector now faces renewed uncertainty following the recent announcement of a 25% tariff on car and car part imports, which could impact supply chains and investment sentiment.

While many PE managers are exposed to these industries, others maintain portfolios that are more insulated. Firms with diversified holdings in sectors less affected by tariffs – such as healthcare, professional services, and software-as-a-service (SaaS) – may experience fewer headwinds. This resilience underscores the importance of portfolio composition in mitigating trade-related risks.

The impact of reciprocal tariffs and global trade retaliation

The retaliatory tariffs imposed by China, the EU, and other trading partners have added further complexity. U.S. companies heavily reliant on exports—particularly in the agriculture, automotive, and industrial manufacturing sectors—face declining international sales and profit erosion. For PE firms invested in these sectors, this could translate to valuation pressures and prolonged holding periods.

Moreover, the broad-based impact on multinational supply chains has led to a reassessment of cross-border investment strategies. Foreign direct investment in the U.S. totalled $72.5 billion in the third quarter of 2024, down 23% over the second quarter of 2024[7], reflecting a cautious stance among international investors. Such shifts could limit exit opportunities for PE firms looking to offload assets to global buyers.

Indirect impacts: Macro factors, IPO market, and M&A activity

Beyond the direct effects, a prolonged trade war could trigger broader macroeconomic consequences that PE fund managers must contend with:

• Market volatility and investor confidence: Equity markets remain volatile amid inflation concerns, economic slowdown fears, and recent U.S. tariffs on key trading partners. To characterise this, the S&P 500 reached an all-time high in February 2025 only to fall by over 10% by mid-March, largely due to steel and aluminium import tariffs. Over the same period (February to March) the Consumer Confidence Index fell from 100.1 to 92.9, its lowest point since January 2021 and fourth consecutive monthly decrease but for a late revision to the February number. This doesn’t bode well for investor confidence and will likely lead to slower decision making.
• IPO market hesitancy: The uncertainty surrounding trade policies has dampened an already subdued IPO market, which could cause major private companies—including AI-driven and tech firms—to delay their public offerings. The VIX Volatility Index (also known as the Fear Index!) exceeded 27 in early March, representing one standard deviation from long-term averages, underscoring heightened investor anxiety.
• M&A slowdown: Recent data indicates a significant decline in global M&A activity, influenced by rising uncertainty and geopolitical tensions. As of the end of the first quarter of 2025, announced deals have decreased by nearly 30% compared to the previous year, marking the slowest deal activity in over a decade[8]. While well-capitalised firms remain active, mid-market transactions have slowed as sellers hesitate to accept lower valuations.

Opportunities amid the chaos: deploying dry powder and capitalising on dislocations

Despite these headwinds, PE firms with high levels of dry powder—estimated at $2.5 trillion globally—are uniquely positioned to capitalise on market dislocations. Distressed asset opportunities are emerging, particularly in tariff-exposed industries where valuations have compressed. Fund managers with sector expertise and rapid deployment capabilities can execute value-driven acquisitions at attractive multiples.

Additionally, the shifting trade landscape is fostering domestic investment opportunities. Companies seeking to mitigate tariff risks are reshoring operations, fuelling demand for infrastructure investments, logistics hubs, and localised supply chain solutions. PE firms focusing on these trends may benefit from government incentives and evolving industrial policies.

Risks for future capital raising

While opportunities exist, the prolonged trade conflict introduces risks to future capital raising. Institutional investors may adopt a more cautious stance, scrutinising fund performance amid heightened volatility. Fundraising cycles could lengthen, particularly for firms with exposure to tariff-sensitive industries.

Moreover, the macroeconomic implications of sustained trade conflicts—including potential recessions, higher inflation, and tighter monetary policies—could dampen investor appetite. As of early 2025, 60% of LPs surveyed in PEI’s LP Perspectives Study 2025[9], indicated concerns about deploying fresh capital in an uncertain geopolitical environment.

Strategic considerations for PE fund managers

To navigate the complexities of Trump’s trade wars, PE fund managers should:

• Reassess portfolio exposure: Conduct stress testing on tariff-sensitive sectors and adjust risk mitigation strategies accordingly.
• Maintain exit flexibility: Explore alternative exit routes beyond IPOs, including secondary buyouts, strategic sales, and recapitalisations.
• Identify opportunistic deployments: Leverage dry powder to acquire undervalued assets in disrupted industries.
• Engage with investors proactively: Maintain transparency with LPs regarding trade war implications and potential mitigation strategies.

While the unintended consequences of Trump’s trade policies pose significant challenges, they also present unique opportunities for private equity firms with the agility to adapt. Navigating this landscape requires a combination of strategic foresight, disciplined capital deployment, and proactive portfolio management. Those who can seize emerging opportunities while mitigating risks will position themselves for long-term success in an evolving global economy.

At Belasko, we recognise the complexities and evolving risks that private equity managers must navigate in the wake of shifting global trade policies. We stay informed on the latest developments and the potential impacts on our clients and their investment strategies. If you’d like to discuss further, get in touch with Paul Lawrence, Managing Director ([email protected]).

[1] https://pitchbook.com/news/articles/ever-changing-tariffs-keep-pe-firms-on-edge

[2] https://apnews.com/article/trump-semiconductors-chips-act-3592f1ed8b8cd4f2145cfa8a4985046c

[3] https://technode.com/2024/11/28/microsoft-hp-and-dell-stockpile-chinese-electronic-components-ahead-of-potential-trump-tariffs/

[4] https://www.fierce-network.com/broadband/will-telecom-be-priced-out-trumps-tariffs

[5] https://pitchbook.com/news/reports/q4-2024-consumer-retail-services-report

[6] https://ionanalytics.com/insights/mergermarket/industrial-ma-soars-in-2024-fueled-by-2h-surge-in-private-equity-north-america-industrials-trendspotter/

[7] https://globalbusiness.org/wp-content/uploads/2024/12/3rd-Q-2024-FDIUS.pdf

[8] https://www.ft.com/content/d90add7b-c884-41a8-b4c9-d7dd72adac18

[9] https://www.privateequityinternational.com/lp-perspectives/