As the impacts of new US tariffs ripple through the global economy, private equity firms face pressure to maintain profitability while managing rising supply chain and liquidity risks.

Firms are already seeing reduced valuations, lower profitability, and challenges to their cash flow. The risk of default has increased, and fundraising has declined. Manufacturers with a global supply chain may experience material cost headwinds greater than 10%.

While uncertainty remains about the ultimate size of tariffs, and firms face various levels of exposure, a wait-and-see approach can be a mistake. Firms that do not act will potentially lose their competitive position, fail to meet customer requirements, and struggle with cash flow.

Assessing portfolio risk and understanding how to respond begins with reviewing how tariffs might impact profitability and liquidity, as well as measuring exposure across the extended supply chain — including suppliers’ suppliers. Depending on their investment thesis and the stage of their companies’ investment cycles, firms can take a range of short-term and long-term actions that will positively impact operating performance while protecting growth and liquidity.

Six strategic levers to strengthen portfolio resilience under tariffs

Successfully meeting the challenges imposed by US tariffs requires taking a detailed look at portfolio companies while deploying a set of actions to mitigate short-term negative impacts and strengthen a firm’s position among competitors in the years to come.

Reassess sourcing exposure across the full value chain

Firms need to quickly assess their tariff exposure across the value chain, including second- and third-tier suppliers. Begin by working with existing suppliers to rebalance sourcing volume and consider alternative sources in countries with less tariff exposure, particularly for high-volume, low-complexity items. Many organizations that are heavily dependent on suppliers in China have already embraced a “China plus one” strategy; nows is the ideal time for others to catch up. Discovering new suppliers with comparable quality standards, developing strategic partnerships, and establishing vendor performance metrics will help build a more resilient supply chain for the long term.

Develop a flexible inventory strategy

The impact of cost shifts on suppliers can be substantial, and firms need to analyze how tariffs affect overall supply chain efficiency and cost at a stock keeping unit (SKU) level. Begin by adjusting the timing and quantity of shipments from high-tariff locations and developing an alternative deployment strategy, which may include regional warehouses and tariff-free zones, as well as updated stocking policies and supplier agreements. By identifying strategic locations for inventory, firms can buffer against volatility and make sure they maintain service levels while managing cost effectively.

Evaluate the complete manufacturing footprint — including partner contracts

In an evolving trade landscape, it is essential to understand the complete manufacturing footprint, including contract manufacturing. Determine manufacturing capabilities and capacity to adjust production volumes and rebalance them in response to tariff exposure. Evaluate alternative options for contract manufacturing and optimize locations, capacity, and lot size across the footprint. Finally, build a capacity plan for the years ahead, with a medium- and long-term view of demand and supply chain options.

Redesign products to maintain quality and control costs

When sourcing from new suppliers with less tariff impact, product redesign is key to maintaining quality while cutting costs. One example: An Oliver Wyman client that used injection-molded containers redesigned their product with thinner walls and potentially a thinner base while retaining functionality, reducing its weight and cost by 30%. Begin the redesign process by analyzing the profitability of each product and customer and then explore cost-saving design options for critical SKUs. Also, identify exemption opportunities that can help lower costs and invest in upskilling employees to do so in the future.

Take a data-driven approach to pricing decisions

Management teams face a dilemma when deciding whether to pass higher costs on to consumers. Higher prices can lower demand and lead to lower annual revenues and profitability but bearing them in full also has negative revenue impacts. Make price adjustments cautiously after determining which products consumers are likely to continue buying despite higher prices. Consider alternatives and substitutes and prepare for shifts in demand. Over the longer term, reassess the entire product portfolio to maintain competitiveness and renegotiate contracts to find savings.

Be proactive in managing liquidity and cash flow

Investing in alternative supply sources and added inventory can strengthen long-term operational stability, but they can also lead to short-term cash flow constraints. Pricing changes can also impact cash flow. Taking immediate action to manage cash flow is essential in this landscape. Identify portfolio companies most valuable to cash shortfalls, monitor for early warning signs, and develop contingency plans. Run cash flow forecasts under different tariff scenarios and conduct a deep dive on liquidity management tools and reporting. Most importantly, maintain open, proactive dialogue with both management teams and stakeholders to avoid unwanted surprises.

Widespread tariffs have brought a new level of uncertainty for private equity firms. Despite the challenges, firms that take immediate and careful action to lessen the impact of higher costs on the supply chain will be positioned to maintain profitability while protecting growth, margin, and liquidity.