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Tariffs and the uncertainty of the
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economy right now is having an impact in
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a wide range of areas. But now private
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equity firms are being impacted. They
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are slowing down their activity around
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dealmaking while focusing on their
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current portfolios due to all the tariff
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activity. Pleasure to be joined right
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now by Bourju Esmer who is a senior
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lecturer in finance and academic
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director of the Harris family
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alternative investments program here at
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the Wharton School. Bourju, great to
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talk to you again. How are you? Very
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good, Dan. It's always a pleasure to
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talk to you. Thank you. And so I guess
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for those people that don't follow us
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closely, talk a little bit about that
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connection between private equity and
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how they're being impacted as all of
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this conversation with tariffs is going
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on. Sure. When tariffs go up, cost for a
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lot of companies rise, especially if
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they rely on imported goods or parts.
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That hits their earnings and makes it
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harder to predict future performance.
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The private equity firms, they really
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need stable earnings to value companies,
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plan the future, plan investments. When
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the environment gets this unpredictable
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with trade policies shifting week to
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week, PE firms, they usually slow down
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because they don't want to buy into a
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sitration where profits could suddenly
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fall because of new tariffs. And in
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general in private markets, the
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sentiment is wait and see. firms are
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being patient. Uh, private equity tends
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to move carefully anyway. And right now,
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most groups are putting their pants down
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and waiting for things to settle. The
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big question is how long can they afford
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to wait? So, when we think about the
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impact, we will talk about these I'm
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sure in the next couple of minutes, but
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there is the portfolio company
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management issue. There's the
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fundraising issue. Are they going to be
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able to get new investments? There's the
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um and then there's the exit issue. How
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are they going to exit? So there are
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multiple legs or proceed uh processes we
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see in private equity that will be that
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is being impacted by tariffs and the
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changes. So, let me ask you about the
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investment side for a second because you
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know the old line we talk about uh in
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and around the markets and Wall Street
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is that the markets love certainty and
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obviously we are at a point right now
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where we're not seeing as much certainty
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and so I would think for investors in
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private equity they would have to be
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very concerned about what is going on
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right now and potentially PE firms
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stepping back. Oh uh that's exactly
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right. I talked to many people, LPS,
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kept providers and GPS, and they're all
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trying to make sense of things. This is
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a chaos. There's a lot of noise. That's
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why they're in this wait and see uh
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stage. But some GPS are pointing to the
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long-term nature of private equity
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investing. So, they basically say, "Oh,
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don't worry. We can we can buy uh by law
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when things are a bit crazy, the market
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a bit messy and we can ride out economic
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cycles. Yes, that's right. There's alo
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there are a lot of opportunities across
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both equity and debt because we know
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that when there's dislocation, we often
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see uh opportunities to create value if
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you're patient. When public markets are
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messy, private equity shines the best in
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general. But at the same time, firms are
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being very cautious. They're modeling
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their uh downside scenarios. They're
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stress testing potential investments and
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they are running a lot of what if
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analysis around trade risk and economic
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risk. They're also working closely with
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trade advisors and legal advisors to
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stay ahead of any policy changes. So
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when necessary of if necessary, they can
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adjust their strategies very quickly. So
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how are the firms then handling the
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portfolios that they already have and
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trying to work with them to keep them as
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strong as possible in this time of of
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flux? The biggest impact biggest concern
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is how to deal with portfolio company
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earnings especially Pback companies in
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manufacturing industrials consumer
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sectors they're feeling the pressure
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from higher input cost. uh it could be
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raw materials, it could be components.
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Uh but all of a sudden, let's say you're
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a Powned auto part manufacturer. Now
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you're facing an increase like 25%
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tariff on certain parts coming from
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China. You see the direct hits to your
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margins, right? It impacts the profit.
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It it m uh impacts your your cost. Um so
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we see this more and more uh often. Some
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companies are trying to pass those to
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the cost uh customers. But this is of
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course a risk. This means that they're
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risking to lose market share. Others are
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choosing to absorb the cost which cuts
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the the profitability. Um so the the it
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it is chaotic. Of course there's the
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supply chain reconfiguration as well. We
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this is something we start to talk about
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during the pandemic and some companies
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shifted to their uh supply chains back
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to the US. Um these were the maybe lucky
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ones but this is just a handful of firms
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right it's a re relocating your supply
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chain it's costly and if you want to do
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it now because you're worried about
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terrorists how it will impact your your
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supply chain uh then you need to take
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action you need to rethink about your
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supplier networks uh but those changes
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they don't come easy they come with
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delays
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inefficiencies extra re rene negotiation
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cost. Um even when companies move to new
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international suppliers like not moving
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to domestic they can still face uh
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logistical hurdles and higher shipping
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cost. So what we are seeing is again
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downside scenarios what can go wrong
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they are reviewing the the the in uh the
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tariffs and the impact of tariffs uh or
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the expectation of changes in tariffs is
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also priced in the the the uh input cost
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as well. So we see a lot of changes uh
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and they see they they're carefully
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reviewing their contracts into detail.
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They're trying to to to make uh the
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changes if necessary and if it is easy
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enough and the the the but the immediate
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thing they do is actually cutting costs.
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So they are very careful about the rest
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of their their balance sheet uh and
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income statement. Uh they ensure pricing
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strategies um account for tariffs. They
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make sure that they don't get caught
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short on tariff goods. So these are the
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immediate actions they do and then
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considering uh relocating their their
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supply chain next. I'll finish on this
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because the the expectation is that no
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matter how this all plays out in the in
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the next several weeks, months, whatever
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that time period is that there probably
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will be some level of tariff that will
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be included in it. are are are private
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equity firms already kind of building in
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what they expect to be at least a
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minimal tariff in place longer term
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right now because they they need to
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think 6 12 18 months out at this point
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they started doing that obviously but
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what they want more than anything is
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clarity once tariffs stay in place once
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the rules are clear and stable they can
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model the risk they can price them into
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their their deals and they can they and
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just move on. It is the constant change
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that is the bigger problem. Private
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equity firms, they are used to dealing
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with challenges, especially the buyout
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firms, they use a lot of leverage. They
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need to be ready to changes in the in
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the the uh environment and in general I
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always say private equity is really all
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about all thinking about what can go
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wrong. This is this is their mindset
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anyway, but they need to know what the
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playing field looks like. Borgu, great
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to have you with us today. Thank you
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very much for your time. Thank you, Dan.
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Thank you, Borgo Esmer, who is senior
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lecturer in finance and academic
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director of the Harris family
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alternative investments program here at
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the Wharton School.
