PE, Tariffs, and Markets. Oh my!

Welcome to this week's Capital Call - your Thursday dose of private market insights without the jargon. At OneFund, understanding market shifts is crucial for making informed investment decisions.

Pour yourself something nice and dive in. 

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🧠 THE BIG IDEA

Trade Wars: When Politics Crashes the Party

The boardrooms of private equity firms are buzzing with tariff talk these days. Recent policy shifts are forcing PE funds to reconsider everything from deal pipelines to exit timelines. The changes are happening fast and in real time.

The escalation in global tariffs—including a 50% increase on Chinese imports and similar levies on EU goods—is compelling private equity firms to reassess cross-border investments and portfolio companies with international supply chains. Major indexes like the S&P 500 have entered bear territory with declines exceeding 20% from recent highs, highlighting how trade tensions are reverberating through private market valuations.

The biggest driver here may not necessarily be the tariffs themselves, but the uncertainty surrounding these tariffs. It’s incredibly challenging to make investment and even operating decisions when massive and unpredictable swings in tariffs could impact your businesses. If businesses at least knew firmly what the tariffs are and would be, they could make decisions given the new status quo. Expect investors to hold onto what capital they have and for fundraising to become increasingly difficult as allocators may follow a similar approach.

📈 MARKET MOVERS

💸 Recession Fears Escalate: Goldman Sachs has increased the probability of a U.S. recession from 35% to 45%, citing tariff impacts. This heightened risk perception could influence LPs' allocation decisions and fundraising timelines in ways public market investors don't face. View the analysis

🏦 Interest Rate Cut Expectations Rise: Investors are now anticipating multiple Fed rate cuts in 2025, with some predicting up to five reductions by year-end. For PE firms, this could mean evolving debt financing terms and potentially lower cap rates. See market expectations

📉 Tariffs Delay Major PE Exits: Shawbrook Bank's £2B IPO has been postponed as private equity owners brace for continued market instability. Exit timelines for PE-backed companies may be extended, affecting fund return expectations and follow-on fundraising. Read about the postponement

🔍 DEEP DIVE

How Trade War and Tariffs Hit Private Equity

This isn't just another market hiccup. The postponement of Shawbrook Bank's £2 billion IPO exemplifies how policy shifts can swiftly alter private equity exit strategies. Originally slated for the first half of 2025, the IPO has been delayed by its PE owners specifically due to tariff-induced volatility, forcing sponsors to reconsider timing and conditions.

There are a few unique ways that alternative markets are impacted, they include: :

1. Portfolio company structure: PE-backed firms often carry higher debt loads, potentially magnifying the impact of input cost increases and margin compression from tariffs.

2. Private credit implications: Interest rates are likely to fluctuate in the coming months. As tariffs potentially drive inflation, interest rates could remain elevated longer than expected, potentially increasing default risks specifically within private credit portfolios with limited refinancing options. On the flip side, if the economy worsens faster than inflation increases, we may see rates decline, accelerating borrowing and refinancing.

What this may mean for private market allocations:

• Geographic diversification considerations: Many LPs appear to be reviewing allocations across regions less affected by US-China tensions, which could provide relative stability.

• Due diligence evolution: PE firms with robust political risk assessment frameworks may be better positioned to navigate these waters successfully.

• Patience may be a valuable approach: Knee-jerk reactions rarely serve long-term investors well. Historically, well-positioned PE firms have adapted to market disruptions and found opportunities amid volatility.

🧰 TACTICAL TAKEAWAYS

• Portfolio exposure assessments: Many LPs are closely examining their portfolios for vulnerabilities to increased import costs and supply chain disruptions, particularly in manufacturing and consumer goods sectors.

• Monetary policy preparation: Some PE managers are preparing for potential interest cuts changes by adjusting financing strategies and recapitalizations, which could influence leverage approaches across portfolios.

• Exit timeline recalibration: Several fund managers are reportedly revisiting planned exits, especially IPOs, in light of heightened market volatility and changes in public market appetite.

🗳️ COMMUNITY POLL

🧵 WEEKEND READS

(Because some light market analysis pairs wonderfully with Saturday coffee)

• 💼 Hg Tops $1bn in Wealth Fund Push - Private equity firm Hg Capital raises $1.2 billion for its Fusion fund targeting high-net-worth individuals, reflecting PE's growing focus on individual investors

• 🤖 Venture Capital's Growing Focus on AI Investments - More than 70% of U.S. venture capital funding in Q1 2025 went to AI startups, highlighting the sector's continued momentum despite broader market turbulence

• 🩺 Healthtech VCs Are Betting Big on AI Diagnostics - WSJ explores how medical AI is attracting unprecedented funding from specialized venture capital firms

👋 WANT IN?

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The OneFund Team

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