Tariff impact on your portfolio companies?

Based on the most helpful WSO content, tariffs can significantly impact portfolio companies, especially those in industries like industrials, consumer packaged goods (CPG), or any sector reliant on global supply chains. Here's a breakdown of how tariffs might affect PE portfolio companies and how funds are navigating these challenges:

1. Industrials and CPG Companies:

   • These sectors are often hit hardest due to their reliance on imported raw materials or components. Tariffs increase input costs, which can compress margins unless companies can pass these costs onto customers—a challenging task in competitive markets.
   • For smaller or micro-cap businesses, which are common in PE portfolios, the impact can be more pronounced as they may lack the scale or pricing power to absorb or offset these costs effectively.

2. Tech and Software Companies:

   • While tech companies may seem insulated, as you mentioned, international exposure (e.g., ~25% revenue from the EU) introduces risks of retaliatory tariffs. This could dampen growth in international markets or increase costs for cross-border operations.
   • Slower cross-selling and upselling, as you've observed, are common during periods of economic uncertainty or trade tensions. SMB customers, in particular, may delay spending on "mission-critical" software if they face financial strain from tariffs or broader economic challenges.

3. Broader PE Market Challenges:

   • The current PE market is already facing headwinds, and tariffs add another layer of complexity. Funds may need to adjust their investment theses, focusing more on domestic markets or industries less exposed to trade risks.
   • Operational improvements and cost-cutting measures become even more critical to maintaining portfolio performance.

4. Strategies to Navigate Tariff Impacts:

   • Hedging and Diversification: Some funds may look to hedge currency or trade risks or diversify their portfolios to reduce exposure to heavily impacted sectors.
   • Supply Chain Adjustments: Encouraging portfolio companies to explore alternative suppliers or nearshoring options to mitigate tariff-related costs.
   • Advocacy and Policy Monitoring: Staying engaged with trade policy developments and advocating for favorable outcomes through industry groups or lobbying efforts.

Your observation about 2025 potentially being tougher than 2024 aligns with broader concerns in the PE community. If trade tensions escalate or retaliatory tariffs materialize, the ripple effects could further strain portfolio performance, especially for funds with significant international exposure or investments in tariff-sensitive industries.

Sources: Protectionism, what is it and how does it impact trade?, Thoughts on KKR Global Impact/Blackstone Impact Investing/Other MF Impact Platforms?, Protectionism, what is it and how does it impact trade?, Private Equity Interview Questions - 13 Topics to Know, A Contrarian View - Raging Bull