Prior to “Liberation Day,” it seemed to be full steam ahead for private markets. Financial media regularly published optimistic stories highlighting the growth potential of private markets. Journalists uncritically quoted fund managers who were “talking their book” and were breathless in their praise of a future in which private assets accounted for a significant share of all retail investors’ wealth—including their 401k’s.
All Aboard! Initial Market Reactions to Tariff Policy Shifts
In the first days after President Trump announced his tariffs, people remained preoccupied with the on-again / off-again / on-again drama, the absurdity that the tariffs might have been based on a formula recommended by ChatGPT, and the silliness of tariffing the penguins of Heard Island and the McDonald Islands. However, in recent days, financial services professionals have begun to acknowledge the serious implications these tariffs have for private markets and the broader financial services industry.
Next Stop: Private Equity Vulnerabilities
The reality is that the Trump tariffs have the potential to wreak havoc with private equity and private credit portfolios. In particular, the portfolio companies of buyout funds—which comprise around three-fourths of all private equity assets—are highly leveraged. Their weak balance sheets make them especially exposed to increased costs for industrial inputs and to the reduced consumer demand that will likely result from the tariffs. The portfolio companies of venture capital firms are in a slightly better position, as their balance sheets tend to be flush with cash. Nevertheless, the demand destruction caused by the tariffs will accelerate their cash-burn rates, raising questions about future fundraising possibilities and realistic valuations in this challenging environment.
The situation looks no better for private credit. Private credit portfolios contain numerous non-investment-grade companies that would struggle with rising interest rates—to say nothing of these firms’ ability to service their debt at higher rates in an environment where end-customer demand has fallen significantly. Interest rates will likely increase due to tariff-induced inflation or—what is far worse—because foreign Treasury holders exit the U.S. market over concerns about the dollar’s reserve status or about effective defaults on Treasury bonds should the “Mar-a-Lago” accord be implemented.
Brace for Impact: Investment Strategy Reassessment
Wealth managers have spent much of the last year rushing to add private market funds to their investment offerings and they have brought on numerous specialized vendors to facilitate these investments for their clients. But if the Trump tariffs remain in place or if foreign investors are subjected to the conversion of their Treasury holdings into zero-coupon century bonds, both wealth managers and their clients as well will rue the day that they hopped onto the private markets train.
Next Train to Mitigate Private Market Risks
Wealth managers must critically evaluate the risks that private market investments pose to their clients in the new economic environment and develop appropriate response strategies. Contact Datos Insights to learn how our expert analysis and data-driven insights can help your organization navigate these market uncertainties and make confident investment decisions.