René Paulussen, Alternatives Leader at PwC Luxembourg, writes that as geopolitical tensions continue to reshape global trade, tariffs have gained momentum in recent months exerting a powerful force on capital flows, corporate strategy, and investment outcomes.
The latest wave of tariffs, intended to rebalance trade relationships, has disrupted cost structures, dampened export demand, and introduced a new layer of political risk into investment decision-making.
The European Union faces a 15 per cent tariff on key exports, a move that signals a shift in transatlantic economic relations. China remains subject to a 30 per cent tariff under the extended US-China trade framework, while Mexico and Canada face 25 per cent and 35 per cent tariffs, respectively, as part of broader trade recalibrations.
Within the alternatives segment of the asset management industry, such a return to protectionism could lead to delayed exists, shrinking internal rates of return (IRRs) and strained deal structures – a triple whammy few can afford. Alternative asset managers in Europe need to brace themselves and prepare proactively if they are to survive, and thrive, in the troubling times ahead.
The hidden cost of protectionism in private markets
Historically, protectionist policies, whether through tariffs or regulatory barriers, were deployed to shield domestic industries from foreign competition. However, their unintended effects have long rippled across global capital flows – and alternative investments were not left untouched.
The 1980s US-Japan trade tensions, for instance, led to significant distortions in cross-border investment strategies, while more recent trade disputes between the US and China have disrupted supply chains and altered the risk-return balance for private market investors.
Alternative Investment Funds (AIFs) are inherently global in scope, with exposures that span markets and supply chains. This deep integration makes them susceptible to the ripple effects of protectionist trade policies, which increasingly influence asset performance across geographies and sectors. For example, tariffs on key inputs such as semiconductors or steel can inflate operating costs for portfolio companies, while retaliatory measures may restrict market access, undermining growth assumptions embedded into investment models.
Counting the cost of protectionism
As tariffs become embedded in the investment landscape, they introduce structural pressures on strategies reliant on long-term return forecasts and well-timed exits. Private assets with extended holding periods are particularly at risk, as shifting trade dynamics can distort cost assumptions and exit valuations. These distortions affect required hurdle rates and valuation multiples, reducing the reliability of return models over multi-year horizons.
One of the most significant financial consequences is the extension of holding periods. When tariffs affect key markets, portfolio companies may be compelled to restructure supply chains or explore new geographies. This operational reset can delay IPO readiness or other exit strategies, pushing timelines forward and increasing management costs, resulting in a drag on IRR.
To manage these delays, some funds turn to continuation vehicles, which introduce financial costs not accounted for in the original investment strategy. These include transaction fees, legal and advisory expenses, and potential valuation discounts, each of which can erode returns and alter the economics for both LPs and GPs.
Infrastructure funds are also feeling the pinch. For example, the Trump administration’s recent decision to increase tariffs on steel and aluminium imports from 25 per cent to 50 per cent is quietly reshaping the economics of infrastructure investment. For projects relying heavily on such imports, the cost implications have become increasingly significant.
In some cases, investors are seeing tens of millions US dollars added to procurement budgets, forcing a rethink of timelines, financing structures, and even project viability.
This change can affect project IRRs, debt service coverage ratios, project viability, and may even trigger covenant renegotiations.
The broader impact of protectionism
Beyond direct financial costs, protectionism has a multifaceted impact on fund strategy, operations, and risk management.
Private equity funds with exposure to manufacturing, logistics, or consumer goods are particularly susceptible to tariff-induced disruptions. Trade barriers compress operating margins, destabilise supply chains, and force strategic pivots that diverge from the original investment thesis, ultimately impacting value creation timelines.
Protectionism also raises geopolitical risk, complicating due diligence and increasing the cost of capital for cross-border deals. These risks are harder to quantify but materially affect deal execution and portfolio resilience.
Geographically, AIFs with mandates in Asia-Pacific, North America, or emerging markets are finding themselves having to navigate an increasingly fragmented trade landscape. Tariffs are contributing to inflationary pressures and currency volatility, both of which complicate financial planning and asset allocation. This often leads to higher hedging costs, mismatches between liabilities and asset returns, and added complexity in portfolio management.
Strategic recalibration
As tariffs now exert a second-order effect on portfolio outcomes across the alternative investment landscape, alternative asset managers cannot afford to adopt a wait-and-see approach. This new reality demands a recalibration of investment frameworks.
For starters, exit strategies for existing investments must be re-evaluated in light of shifting trade alliances and evolving regulatory responses. What might have been considered a reasonable timeline for exit just a few years ago might need to be completely overhauled amidst the new protectionist reality.
As for due diligence over new investments, it should incorporate multifaceted geopolitical risk assessments. As a matter of fact, such risks (trade wars, sanctions etc.) were, for a long time, a mere side consideration. Now, they’ve become a core factor in evaluating an investment’s viability and long-term prospects.
The imperative is to actively integrate trade exposure when making investment decisions. For AIFs, this means identifying and mapping tariff risks across asset classes, quantifying their potential impact on valuations and cash flows, and adjusting strategies accordingly, whether through geographic diversification, targeted hedging, or selective sector rotation.
In a protectionist climate, managing trade-related risks is as critical as delivering strong IRRs and securing premium valuations at exit.
