Tariffs add new hurdle to private equity's exit challenge

Aggressive US tariffs are adding complexity to private equity's most pressing challenge: exits.

The industry entered 2025 with high hopes for improving exit conditions, encouraged by a 5% year-over-year uptick in the number of buyout fund exits in 2024. But uncertainty slowed the pace of exits in the first quarter, and fund managers are evaluating the effect of President Donald Trump's sweeping tariffs announced April 2.

Private equity firms positioning portfolio companies for sale need to quickly gain an in-depth understanding of those assets' exposure to tariffs, said Kevin Desai, who advises private equity firms as PwC's sector leader for the industry. Particularly for portfolio companies with complicated supply chains, uncertainty concerning tariff impacts threatens to extend sale processes and reduce the sellers' return on investment.

"You have to put a box around the risk," Desai said.

Prepping portfolios

KKR & Co. Inc. acknowledged in a 10-K filing earlier this year that tariffs "have the potential to increase costs, decrease margins, reduce the competitiveness of products and services offered by portfolio companies and adversely affect the revenues and profitability of portfolio companies."

The firm did not respond to a request for comment.

Many private equity managers understand their direct exposure to tariffs via portfolio companies and their suppliers, said John Fiorentino, a managing director in Alvarez & Marsal's private equity improvement practice. However, fewer managers have dug down to the level of their suppliers' suppliers, Fiorentino said.

"What you don't know is the inflationary exposure that's underneath that, when your supplier now passes on a 25% [price] increase," Fiorentino said.

Companies are poring over supplier contracts and optimizing existing supply chains. But many are delaying significant investments until they know whether steep tariffs are here to stay or just the brash opening to further trade negotiations with US trading partners.

"The uncertainty is huge. I can't think of a single example in 2025 where somebody has made truly transformative changes to their supply chain," Fiorentino said.

Deals and volatility

Optimism for private equity deals in 2025 was widespread. More than 70% of the private equity and venture capital general partners surveyed by S&P Global Market Intelligence in late 2024 and early 2025 predicted private equity deal activity would improve this year.

New investment activity has been robust in the first quarter, with private equity deals totaling $221 billion globally, up 67% over the first quarter of 2024, according to Market Intelligence data.

Deal momentum could continue. Private equity typically turns volatility into its advantage, scooping up companies with valuations dented by market fluctuations. As KKR CFO Robert Lewin told a conference audience in February, the long-dated nature of private equity investments means managers can buy low and ride out economic cycles — or presidential administrations — until the opportune exit moment.

"In a lot of ways, volatility, while it could be painful to go through, could certainly be beneficial to our business and has been, if you look at past moments of high volatility over time," Lewin said.

Focus on fundamentals

The prospect of a tariff war comes as the industry faces increasing pressure to produce exits and return capital to investors.

Exit activity throttled by higher interest rates and a stubborn buyer-seller divide was showing signs of improvement in late 2024, when the average holding period for a buyout fund portfolio company was 6.1 years compared with 6.2 years in 2023, a 10-year high, according to Preqin Pro data.

Managing portfolios during a slow exit environment likely prepared private equity fund managers for this moment, according to Patrick Quay, Americas strategy and transactions private equity leader for EY-Parthenon.

"In concert with hold times extending, you've seen a much larger movement towards true underlying value creation by private equity managers, and not just financial engineering," Quay said.

That focus on fundamentals should have private equity set up to execute on exits, with secondary sales and trade sales to strategic acquirers likely to recover first, Quay said.

Private equity-backed IPOs — which numbered 212 globally in 2024, the most since 2021 — may take until late 2025 or 2026 to recover while sponsors ride out the current market volatility.

"The underlying conditions for private equity to both deploy new capital and to exit existing positions are still there. The tariffs will put a pause on that, but I still expect 2025 activity to be in excess of 2024 by the end of the year," Quay said.