Private Equity Navigates International Trade Tensions

By Scott Hendon

For private equity firms with significant investments in the manufacturing and distribution industry, 2018 has been a year of uncertainty. President Trump recently announced the imposition of a 10% tax on Chinese imports, set to climb to 25% by year-end. China was quick to retaliate with new tariffs ranging 5% to 10% on $60 billion of U.S. goods, and pledged to increase rates, as well. Faced with shifting trade alliances, along with North American Free Trade Agreement (NAFTA) renegotiation and significant tax overhaul, some fund managers with a stake in manufacturing and distribution are seeing a shift in deal flow. Many are taking a wait-and-see approach while they assess the immediate and long-term effects of the Trump administration’s trade policy decisions on the manufacturing industry, which has long looked to foreign countries for supply chain operations, growth markets, and labor.


As the Trump administration continues to work towards “leveling the playing field” for United States’ manufacturing, private equity firms with stakes in domestic and foreign manufacturing alike are finding the predictability and calculation of future cash flows less certain. Shockingly, during the first half of 2018, Chinese foreign direct investment into the United States totaled a mere $1.8 billion – that’s 90% less than the comparable period last year and the lowest level in seven years. Shifting trade alliances will cause companies to find themselves bound to new policies and regulations that may prompt massive revamps of current processes, standards and operations. Meanwhile, those that rely on imported goods could see their production costs increase, while manufacturers targeted by retaliatory tariffs may find their products becoming less competitive abroad.

In reality, though, the full scope of effects from trade tensions remains to be seen. For fund managers concerned by these changes, uncertain manufacturing costs represent a significant threat. Portfolio deal valuation regularly hinges upon a complete understanding of a business’s capital expenditures and future cash flows – figures that have become much harder to forecast in light of the current trade climate. As a result, fund managers are decelerating deal flow with manufacturing-heavy businesses, especially those sole-sourcing from China, which has largely been the focal point of trade disputes. And Chinese funds are doing the same: over the first five months of 2018, investors divested nearly $10 billion in U.S. assets, according to research from the Rhodium Group. Simultaneously, U.S. private equity firms are seeing manufacturers shift towards onshoring, as domestic operation grants business greater protection of intellectual property and helps minimize both lead times and supply chain disruptions.


Since NAFTA’s implementation in 1994, Canada and Mexico have become the United States’ second and third largest trading partners, respectively. Along with the creation of nearly 5 million jobs, the robust trade relationship has led to increased cross-border investment interest and opportunities among private equity firms.

In an effort to reduce the trade deficit, the Trump administration has been vocal in their support of NAFTA renegotiations. Particularly, by strengthening the rules of origin, U.S. policymakers look to ensure that the benefits of NAFTA go to products made in the United States and North America. Though, by excluding or raising costs of imports into the U.S. from Canada and Mexico, the ability of American manufacturers to remain competitive producers could in many cases be undermined.

Another key topic of NAFTA renegotiation, U.S. policymakers are looking to ensure that foreign provisions governing intellectual property rights reflect the standard of protection offered in the United States. Canada, specifically, has landed itself on the National Association of Manufacturers’ country watchlist for IP violations, due to a weak patent review process, insufficient protection of confidential data, piracy, and counterfeiting. A shift towards more stringent regulations means that fund managers are still eager to engage in deal making with companies that that withhold valuable IP assets.


Private equity firms should consider how these regulatory shifts affect the manufacturing and distribution channels of businesses in their portfolios before engaging in any transactions.



1) Assess impact. M&D fund managers may need to review the full text of the trade legislation and tariffs, measuring the specific circumstances of companies within a portfolio against the text to assess the impact of each provision, as well as the holistic effect on the bottom line of these companies. Private Equity firms may wish to submit product exclusion requests, which, if approved by the government, can save high volume importers millions in tariffs. General Partners (GPs) should be prepared to communicate with investors the potential impact of tariffs or trade pact changes on their returns.

2) Assemble a team. While the heaviest burden may fall on accountants, individual companies and their finance teams will all have an important role to play to gather all the necessary information.

3) Dig into the data. Assessing the impact of trade tensions requires a substantial amount of data to be readily available. GPs can use this data to begin modeling how trade changes within certain areas of the world will affect their portfolio companies’ businesses.

4) Establish priorities. When considering which aspects of trade tensions to tackle first, focus on the areas that could have the greatest impact on companies within your portfolios. For portfolio companies that are drastically affected, it may be worth prioritizing a reassessment of the supply chain network to unearth potential savings. 

5) Initiate conversations with your tax advisor. Trade tension of this magnitude is the biggest disruptor to international M&D we’ve seen in several years and will require intense focus to understand not only how the changes apply at a federal level, but also how to navigate the ripple effect this is likely to have on the fund lifecycle as well.
For private equity firms with significant investments in manufacturing and distribution, trade tensions and NATFA renegotiations could create a sea change in the way companies do international business. These developments have the potential to impact PE throughout the fund lifecycle entirely, as deal valuation hinges in part upon the predictability of future cash flows. As the effects of each remains uncertain, fund managers are relying on a “wait and see” approach to deal making as they brace for the comprehensive impact of trade tensions.



National Private Equity Industry Group Leader