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