By Kevin Smith
The private equity landscape is experiencing transformative changes due to evolving market dynamics and the new U.S. presidential administration. Political shifts usher in a wave of both risks and opportunities that firms must adeptly navigate to sustain their competitive edge and seize emerging trends.
Investor confidence has fluctuated due to recent economic changes. Initially, there was a confident boost as investors anticipated stability and clarity from the new leadership. However, the reality of the Trump administration’s policies has introduced new uncertainties, particularly regarding tariffs and regulatory changes.
Impact of tariffs and infrastructure investments
One of the most significant risks for PE in the current political climate is the imposition of tariffs.
The administration’s focus on repatriating manufacturing and imposing tariffs on imports, particularly from China, poses challenges for investments. While PE is somewhat sheltered from tariffs due to its focus on intellectual property and service investments, the dependency on lower-grade chips from China remains a concern.
Despite these risks, the new administration’s emphasis on infrastructure development presents a substantial opportunity. The need for enhanced infrastructure to support manufacturing repatriation and the continued development of artificial intelligence and data centers creates a favorable environment for long-term PE investments.
The administration’s policies aim to make America a manufacturing center, necessitating significant infrastructure investments.
However, the cost of capital is a critical factor that cannot be overlooked. With interest rates remaining high or potentially increasing, capital remains very expensive.
This presents a double-edged sword. On one hand, there is a significant opportunity to invest in infrastructure due to the high demand for manufacturing facilities, data centers, power sources and an enhanced power grid. On the other, tariffs increase the costs of the materials necessary to build the infrastructure needed, and immigration policies may drive up labor costs for construction jobs.
Green energy and environmental policies
Current green energy and environmental policies introduce both risks and opportunities for PE firms. The slowdown in green energy investments doesn’t just affect wind farms or the environment — it also impacts the technology companies that serve these areas.
PE firms, which are often overweighted in intellectual property, technology and service sectors, face risks due to this slowdown.
The potential reduction in federal funding for programs such as the Rural Energy for America Program, managed by the USDA, poses further challenges. This funding, which is currently directed toward green energy for rural areas, is now in jeopardy. The potential discontinuation of this funding contributes to overall market uncertainty.
The demographic shift during this new administration has a significant effect on the availability of capital. As baby boomers retire, they are taking money out of the market and putting it into safer investments like T-bills, CDs and municipal bonds. This shift reduces the amount of capital available for deployment.
Deregulation and AI investments
The emphasis on AI and deregulation creates a promising environment for PE investments. These policies could drive firms to invest in AI technologies aimed at enhancing efficiencies within government agencies and improving digital health services. By leveraging these advancements and the administration’s support, firms can capitalize on the rapid growth of AI technology and the resulting economic opportunities.
PE bets in AI have been fewer but much bigger, leading to some risk in concentration. The heavy investment in AI, coupled with deregulation, suggests that this sector may see significant growth. However, it also means that the stakes are high, and the outcomes could be polarized, with some companies emerging as big winners and others potentially facing losses.
Strategies for navigating uncertainty
In times of political and economic uncertainty, PE firms must adopt strategies to mitigate risks and capitalize on opportunities. One effective approach is to de-risk investments by putting follow-on rounds into entities they are already involved with or taking minority positions in companies that are already growing. This strategy reduces the risk associated with new ventures and leverages existing relationships and investments.
PE firms may see more syndicated deals, where multiple funds come together to make an investment rather than a single fund making the entire investment. Syndicated raises can help spread risk and increase the chances of success, as they involve collaboration and shared expertise among multiple investors.
The PE sector has demonstrated resilience in the face of various challenges. It has survived inflation, tariffs and other economic disruptions, showcasing its flexibility in where money gets placed. When business is good, the PE market thrives, and even when business is bad, the sector performs relatively well. This adaptability and resilience make PE a robust investment option in both favorable and challenging times.
Kevin Smith is a partner and the national leader of Wipfli’s Technology and Innovation Industry. In this role, Smith aligns Wipfli’s broad portfolio of consulting and financial services to accelerate growth for technology-centric clients. With a successful history of driving growth in private equity-held technology and professional service firms, Smith is uniquely attuned to opportunities and optimizations that provide immediate impact for scaling technology companies.
Illustration: Dom Guzman
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