Cautious Investors Pull Back: PE Deal Momentum Stalls in Midwest, South in Wake of Trump's Tariff Enforcement

In the heartland of America, the battle cry of ‘business as usual’ might not be as resonant these days. The initial aftershock of President Trump’s ‘Liberation Day’ tariff announcement was a nationwide slowdown of private equity (PE) deals. Still, the devastation was not shared equally across all regions. The Midwest and the Southern United States experienced a startling 32% drop in PE deals during Q2, outpacing other regions for the steepest decline. The Southeast too experienced a quarter-over-quarter decrease in deal count, trailing closely behind at 26%. Local markets with heightened exposure to tariff ambiguity, along with the limited deal pipelines of regional PE firms, bore the weight of this decline. Market players have witnessed a shrink in the number of term sheets crossing their desks, particularly for industrious modern-day goldmines like niche manufacturers and restaurant chains. These sectors, highly susceptible to policy shocks, constitute a significant part of the Midwestern and Southern GDP, which is why the trade policy announcement affected these regions more. Compounding this strain, the structural profile of General Partners operating in these areas is different. They are usually young firms running smaller funds, leaner teams, and primarily concentrating on one or two sectors. These firms are tied to, and often restricted by, local economic conditions. Consequently, they lack the scale to initiate deals outside their home markets. When the local markets are hit by tariffs or diminishing consumer demand, these small firms face challenges sourcing new ideas. However, amid this uncertainty, there seems to be a glimmer of hope. Some signs point towards an increase in deal activity in recent times. It remains to be seen whether this uptick will provide much-needed respite from the economic ripples caused by the tariff announcement.