[SINGAPORE] In just three months, private equity markets’ initial optimism for a busier year has largely dissipated. Instead, the turmoil unleashed on global financial markets by President Donald Trump’s Liberation Day tariffs is quashing activity in private equity (PE), particularly as billions of dollars worth in mergers and plans for initial public offerings (IPO) are halted.
Managers of PE funds, also known as general partners (GP), rely on deal flow to exit and generate returns for their investors, which typically include pension funds, sovereign wealth funds and insurers. The cautious mood in PE is a vast turnaround from the anticipation that the second Trump administration would fan increased activity in mergers and acquisitions (M&A) and IPOs amid expectations of fewer regulations and lower taxes.
“The level and the broad nature of the tariffs have thrown a wrench into that (optimism)… but we will have to wait and see how things evolve. But yes, in the near term, the exit activity that was supposed to be led by IPOs and M&A has come to a halt,” Nitin Gupta, managing partner at Flexstone Partners, an affiliate of Natixis Investment Managers, told The Business Times.
Trump’s announcement of reciprocal tariffs in early April customised to countries running trade deficits with the US set off a global, deep market sell-off. He later backed down and announced a 90-day pause for tariffs on all countries except China. Since then, markets have been whip-sawing between losses and gains, in response to the various changes in tariffs being announced.
The ongoing volatility could lead investors to slow their capital deployment to new private-market funds. That’s because the retreat in public markets will drag down the value of these investors’ exposure to such assets, in turn inflating the value of their private allocations. This could place them over their target allocations, said Audrey The, partner at global investment company Cambridge Associates.
Together with the potential extension of the longest drought in distribution since the global financial crisis, GPs could turn to other exit options, she added. Distribution refers to the capital that GPs return to investors.
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“We will likely see non-IPO exits pick up first. GP-led secondaries and continuation vehicles are also increasingly being used.”
GPs can create liquidity by leaning on the secondary market, one where investors can exit early from their commitments by selling to players such as other GPs, institutional investors and high net-worth individuals.
Booming secondary market
Global activity in secondary deals in what was previously a niche market has surged in the past few years, as higher interest rates and a slowdown in dealmaking squeezed the US$4 trillion buyout industry. Last year, the secondary market boomed, with the volume of transactions surging 45 per cent from 2023 to a record high of US$162 billion.
Private market data provider PitchBook said there’s an overhang of US$1.5 trillion in PE globally that’s been committed, but not deployed as at the end of 2023. With the need to deploy capital, GPs and their investors are taking a more active stance in managing their portfolios, said Jamil Raza Syed, private equity leader at Deloitte Southeast Asia.
“Investment committees are scrutinising potential deals more rigorously, particularly focusing on a company’s vulnerability to supply chain disruptions and tariff exposure,” he said.
Despite the ongoing uncertainty, GPs can still unearth investment opportunities. For instance, companies in sectors that tariffs are taking aim at could see their valuations reduced. Such a scenario could “either deter deals or create opportunities for buyers to purchase distressed assets,” Jamil added. “Additionally, some businesses may enter the market as owners no longer wish to endure further volatility.”
Smaller and mid-sized PE deals, which Schroders Capital defines as those involving companies each with an enterprise value of less than US$1 billion, are likely to stand out.
Such companies are “attractively priced and less affected by geopolitical and trade conflicts,” Nils Rode, chief investment officer at Schroders Capital, said in an April 14 report.
Renewable energy infrastructure, private credit
Infrastructure investments related to renewable energy in Europe and Asia provide good opportunities as well, he added, calling them “the most attractive” given the pushback from the current Trump administration.
Schroders is also positive towards real estate equity. Citing rising evidence of positive deal flow and pricing, Rode said, “performance is expected to be sequential across markets, and we believe that 2025 will be a strong vintage year for deployment despite the impact of tariff escalations.”
Private credit, where non-bank players lend to companies without buying equity, could also benefit from the current market turmoil. That’s particularly if banks tighten lending to companies that might be hurt by tariffs, said market players.
“If there is any pullback in the traditional bank lending channels, private credit will be able to step in… This environment can also create dislocation in the credit markets which can benefit opportunistic credit managers,” said The from Cambridge Associates.
Schroders sees “promising opportunities” in specialty finance, asset-based lending and infrastructure debt, which offer steady and high-income cashflows. “The uncorrelated nature of these investments delivers a disproportionately beneficial outcome in an environment where macro-economic conditions are uncertain or deteriorating,” Rode said.
Still, Deloitte’s Jamil cautioned that demand for private credit could shrink temporarily, if companies pause significant capital spending as they assess the impact tariffs would have on their supply chains and earnings.
In that scenario however, specialists in distressed debt – a type of private credit – could find opportunities as “some businesses may struggle with sudden changes to their operating models.”
To be sure, Flexstone’s Gupta said credit markets remain liquid at the moment, while banks are generally in a much better shape compared with the global financial crisis.
