What Do Tariffs Mean for Private Equity?

Anu Rajakumar: As the United States navigates a shifting landscape of trade policy under a new administration, markets are grappling with the implications of sweeping tariffs and their prospective impacts on growth, inflation, and the markets. In a world where trade tensions and tariffs increasingly dictate the flow of goods and capital, how are private equity investors uniquely positioned to navigate these challenges? Could this shifting economic landscape present not just risks, but also untapped opportunities for growth?

My name is Anu Rajakumar, and joining me today is Ralph Eissler, Head of Private Markets Research, who will help us unpack the complexities of tariffs and how private equity investors can potentially navigate these uncharted waters. He's also the author of a recently published insights piece titled Tariffs Are Here: What Does That Mean for Private Equity? Ralph, welcome to the show.

Ralph Eissler: Thank you, Anu. Great to be here.

Anu Rajakumar: Now, Ralph, as we all know, early this month, the Trump administration launched its first salvo in its promised tariff policy. Let's start high level today and let's discuss the key drivers behind the policy shift.

Ralph Eissler: The way that we understand the policy, there's a dual approach. One is the administration considers tariffs as a structural policy tool, generating revenue by taxing access to the US market. The second way is it's a negotiation mechanism. You can leverage tariffs to secure favorable trade terms with other nations. Which one of the two is the more focused of the administration or whether the administration will continue to focus on both? We will see in the future.

One thing that I would like to mention how the US is particularly unique position to follow a policy like that, if you look at the share of goods that are imported in the US, that's equivalent to roughly 15% of GDP. That's reasonably low compared to someone like the UK, which imports roughly 30% of its GDP. Germany has more than 45%. In so far, the US has a particularly strong stance to use tariffs.

Anu Rajakumar: Yes, sure. Absolutely. Thank you. Now why don't we also talk about the market reaction to these tariff announcements? Also, share some of the broader economic implications as well.

Ralph Eissler: When the first several tariffs was announced, people saw it over the weekend, the futures markets were down, Asian markets were down. That continued until the moment that the revelation came. Canada and Mexico are for now exempt. Why that is happening is because tariffs have or markets expect tariffs to have an impact on inflation, growth, and earnings. Now, the expectation for tariffs by the market is to drive up consumer prices and therefore impact supply chains.

Think of autos manufacturing. Now, the administration's stance on the impact on inflation is slightly different. The administration considers it a one time jump and therefore no rolling inflation impact. We will see how that plays out in the long run. The main difference that we saw, I believe, in markets on the public side where you are located versus private side, private markets have more or less shrugged it off. I think the public side is much more sensitive than my side of the house.

Anu Rajakumar: I think you're right. I think we're a little bit more aware of what's happening over the weekends now and just being prepared to respond, whether it's communications, because, as you said, sometimes these announcements do happen on the weekends. We need to be prepared as soon as markets open on a Monday morning. Now, Ralph, looking at your publication that I mentioned in the opening, you noted that private equity portfolios generally have less exposure to sectors heavily affected by tariffs, such as industrials and consumer goods. Could you just elaborate a bit on how this sectoral diversification at times really shields private equity from tariff-induced disruptions?

Ralph Eissler: Sure. That's indeed the main piece of our paper. I'll guide the way how we got to that.

Anu Rajakumar: Terrific. Thank you.

Ralph Eissler: We started out with the observation, private equity seems to be more heavily invested in service based and intellectually property based industries, less so in capital intensive or more import-dependent industries. Then we tried to take a deeper look to understand whether private equity sector exposure matches that of overall GDP contributions. There we took a two-step approach. First, we sorted all the different sectors according to how import-dependent is a sector of the economy.

We found consumer discretionaries and industrials are the most import-dependent sectors. They import lots of physical goods. Whereas, for example, utilities, financials, or real estate, they are the least import-dependent sectors of the economy. Now, going from there, we took a second step and said, "How much do these sectors actually contribute to GDP versus how much of private equity net asset value is invested in these different sectors?" When we look at, as you also mentioned, consumer discretionaries and industrials, they are heavily import-dependent and they account for almost 45% of GDP contribution in the US, but only for 23% of net asset value and private equity investments.

On the flip side, we find heavy private equity investments in sectors such as healthcare and technology, which are only somewhat dependent on imports, much less so than consumer discretionaries or industrials. These two sectors account for almost 43% of private equity net asset value, whereas only 14% of GDP contribution. You have this disparity between heavy GDP weight on imported-dependent sectors versus private equity going more long on the less import-dependent sectors.

What we find in addition is PEs more invested in middle market and smaller companies, you might say almost local businesses. We ourselves have pivoted in the last couple of years, meaning Neuberger has pivoted in our own portfolio towards sectors that are less import-dependent. What we can observe in the data is that apparently, the industry as a whole has followed the same stance and strategically avoided import and export-reliant industries over the past recent years.

Anu Rajakumar: I will say that for those who are listening, there is a terrific chart in your insights piece that really well illustrates everything that you're saying. It makes it really easy to see where the exposures are. Ralph, I'm just curious while private equity really does seem to be well positioned, as you've just articulated, we're also acknowledging that these large-scale tariff regimes could lead to inflation and some other macroeconomic headwinds. With that in mind, I just wondered if you could elaborate on some of the risks that you see ahead, as well as how private equity firms may be empowered to turn these tariff challenges into opportunities for value creation.

Ralph Eissler: Sure. Let's look at the risks first. You mentioned there are risks to growth. There are risks that inflation might come back. The exposure to the overall economy is there for private equity, just as for everybody else. To the extent that tariffs indeed induce inflation or impact GDP growth, that will shape the exit environment for private equity firms. I would put that in the risk bucket. One more thing to maybe consider, while I said industrials is less exposed in private equity, there's still roughly 15% of NAV invested there.

To the extent these 15% are heavily exposed to imports or export, there may be certain write-downs or changes to the business models. However, when we look at potential opportunities, we see great opportunities, particularly for the US. We are particularly positive on US growth. Then the other thing that I would keep in mind is private equity is very, very good at taking advantage of change and dislocation. When you look at carve-out situations or divestments, that's where private equity is very, very good in helping establish companies.

In situations where markets are disrupted and there is change occurring as well as deconsolidations, there are opportunities for private equity investors. Even when you look at international markets, private equity has in the past shown its ability to help multinationals who had to retool their supply chains or divest an international business that they could no longer own, or that was loss-making, take that under their umbrella, and then sell it to the right buyer.

Summarizing, I would say that private equity is a long game on change and disruption. When you keep in mind there's ample supply of capital currently in private markets, both on dry powder for private equity investors, as well as on the private debt side. However, we all want to be nimble when looking at these opportunities and forward-looking strategies. Every deal that we look at is different. Private equity, real diligence, every single investment opportunity, every company, and every asset that comes its way for the growth opportunities in each case. There's no one-size-fits-all.

Anu Rajakumar: That's terrific. I'm curious, Ralph, did any of the results surprise you at all when you did this digging in and found these two layers of data that you were collecting? Any surprising results that you found?

Ralph Eissler: Not really. As I say, we had a hunch. Then based on our own data, we knew what we were invested in. Then based on that, we said, let's look at the industry-wide exposure. Given how private equity investors are trying to position themselves for any all-weather occurrence in the overall economy or politically, it didn't surprise me very much. It's in part of diversification play. In part, it's a, "Oh, I'm going to pivot towards sectors that may be less exposed to any risks."

Anu Rajakumar: Absolutely. Ralph, as we wrap up here, I want to turn a little bit to your outlook. With these evolving global trade dynamics, what do you think is in the future for private equity, and any other important concluding thoughts that you want to share?

Ralph Eissler: Looking at what we've observed now, we think private equity generally conveys the benefit of having longer-term investments instead of navigating a volatile environment. Of course, private equity investors therefore have the benefit of having 5 to 10-year investments in contrast to what you observe in public markets. Then you urgently need to focus on what your sector exposure is, that you're not overexposed to certain sectors, and potentially avoiding certain sectors that you think are risky in the medium or longer term. That's precisely what we observe in our paper. The industry as a whole has avoided import-export reliance sectors.

Now, one thing that I think is important to note is having exposure to private equity is also giving you exposure to change and disruption, dislocation. It's a long game on opportunities in that area and, therefore, I believe it's helpful for even individuals to consider, "Oh, would this be something that would fit into my portfolio?" For individuals, of course, it is important to understand the risks of this asset class.

Anu Rajakumar: Absolutely. Ralph, thank you for those thoughts. I can't let you go without a quick bonus question though. We're recording this episode right after one of the biggest sporting events in the world, the Super Bowl. As a fellow European, I'm curious, are you a fan of American football, or do you have a different sport which is one of your favorites?

Ralph Eissler: I love American football for the speed and action that happens.

Anu Rajakumar: [chuckles] Terrific.

Ralph Eissler: What is painful for European is the advertisement breaks.

Anu Rajakumar: [chuckles] Even at the Super Bowl though? I feel like that's the one day where it's actually slightly more interesting. [laughs]

Ralph Eissler: There's the entertainment indeed. I must say, I'm more of a soccer fan.

Anu Rajakumar: Do you have a team that's your favorite?

Ralph Eissler: Not truly. I'm German. I love Stuttgart to perform. Bayern Munich is always better, but that's it. [laughs]

Anu Rajakumar: As an Arsenal fan, good to know. Ralph, thank you so much for coming on the show today. It's been fascinating to hear how private equity portfolios with their strategic sector exposure and operational agility may be uniquely positioned to mitigate the impact of tariffs even as broader economic concerns loom. I especially liked the line that you used. Private equity really is a long game on change and disruption. Thank you again for joining us.

Ralph Eissler: Thank you for having me.

Anu Rajakumar: To our listeners, if you're interested in learning more on this topic, please visit neuberger.com where you can read Ralph's full insights piece titled Tariffs Are Here: What Does That Mean for Private Equity? If you're based in the US, I also encourage you to visit our Private Markets Academy which provides insights to educate, elevate, and empower portfolios with private markets exposure. You can find that at neuberger.com/privatemarketsacademy. If you haven't already subscribed to the show, please do so. You can find us wherever you typically get your podcasts or you can visit our website, neuberger.com/disruptiveforces for previous episodes as well as more information about our firm and offerings.