Tariffs could be positive for private equity M&A: executive

A possible trade war might seem unsettling to the M&A market, but one executive thinks tariffs could lead to a flood of deals.

This year, the administration slapped tariffs on imports, including steel and aluminum, from trading partners such as Europe, Canada and Mexico.

President Donald Trump also is weighing doubling tariffs on $200 billion of Chinese goods, boosting taxes to 25 percent from 10 percent, the New York Times reported Aug 1. China, in retaliation, plans to impose tariffs of up to 25 percent on more than $60 billion in U.S. products.

The dispute comes during a boom time for private equity. PE firms are raising more money at a faster rate. Uncalled PE capital stands at more than $1 trillion, while a record 4,369 funds are seeking a combined $1.5 trillion, Preqin reported.

Funds need less time — about a year — to raise money, down from 14 months for funds in 2017, Preqin said. Companies are also selling at record multiples.

Tariffs could damp the private equity party — and this might be a good thing, said Paul Aversano, a managing director and global practice leader of Alvarez & Marsal’s transaction-advisory group.

Asset valuations are at records all over the world, Aversano said. Companies that are potentially hurt by tariffs could take a valuation hit, he said. This would make them more attractive acquisition targets for PE, which has lots of money to invest, he said.

Some GPs have stayed out of the M&A market because prices are too high. If tariffs do cause M&A prices to drop, a “wave of capital, or dry powder, will come off the sidelines,” Aversano said.

He emphasized that he doesn’t think that tariffs are a good thing but that their impact could be positive for PE M&A.

“I know so many clients that have not done a transaction because they don’t want to pay 13x to 14x for a brick-and-mortar business. How do you make money on that?” he said.

Tariffs are expected to increase prices on various household goods, including beer and washing machines.

Aversano cautioned that only a small number of tariffs have been enacted. Most of the taxes, including the 25 percent tariff on Chinese goods that is being considered, won’t hit until 2019, he said.

“We are not in a trade war,” Aversano said. “If we were in [one], the Dow would be down hundreds, thousands.”

Aversano’s group provides preacquisition due diligence; it worked on more than 1,000 transactions with more than 250 different investor groups in 2017.

This year, Aversano said he’s seeing companies front-running purchases such as raw-material inventory in industries that could be affected by the tariffs. Instead of buying 100 items, companies are purchasing 500 at today’s pricing to get ahead of increases, he said.

With 25 years of experience, Aversano said he’s never seen a global environment with so many variables. This so-called vortex of volatility could affect M&A, he said.

In addition to tariffs, other issues that could affect M&A include interest rates, currency movements, inflation, geopolitical instability, North Korea, Brexit, regulation around foreign investments like CFIUS, and Russia.

“The world is an increasingly global place,”Aversano said. “There is any number of things that could drive deal-making activity up or down.”

Action Item: Reach Paul Aversano at +1 212-328-8709