By Most American stocks crashed last week as concerns about Donald Trump’s tariffs caused shockwaves in the financial market. Technology stocks were among the top laggards as the tariff issue coincided with concerns about the artificial intelligence industry.
Private equity stocks were also some of the worst performers in the S&P 500 index. This article explores why these stocks crashed, and whether it is safe to buy the dip.
Private equity stocks have crashed
Top companies in the private equity industry plunged last week as the market reacted to Donald Trump’s Liberation Day tariffs. Apollo Global Management (APO) stock price crashed by 21%, making it one of the top-ten laggards in the S&P 500 index during the week.
KKR stock price dropped by 20.7%, while Blackstone fell by 13%. Other companies in the industry, like Carlyle, Ares Management, and Blue Owl Capital also dropped by double digits.
Portfolio companies to be exposed to tariff risks
The first main reason why private equity stocks crashed is the Liberation Day tariffs that Trump announced on Wednesday. His tariffs include a global minimum rate of 10%, with some countries seeing rates of over 50%.
These tariffs will largely hit most companies, whether they do business in the US or not. This includes companies that these private equity companies own.
However, the direct impact of tariffs on these private equity companies will be limited because of how they make their money. Most of these firms make most of their cash from their assets under management.
For example, Blackstone made $1.648 billion from management and advisory fees in the fourth quarter. It then made $240 million in incentive fees, making it a smaller part of its business.
However, a recession can still expose these companies to risk, since they have become large players in the private credit industry. In private credit, these firms provide loans to companies across different sectors. The risk is where these recipients go out of business during a recession.
Difficulty in exits
The other reason why private equity stocks have crashed is that the ongoing market conditions are not ideal for exits. An exit is a situation where PE companies realize their investments. This typically happens through initial public offerings (IPOs) and sales.
PE companies now hold over 29,000 companies worth $3.6 trillion that they hope to exit, a difficult thing during a period of heightened risks.
Their hope was that the Trump administration would usher in a period of deregulation and low inflation, which would fuel more activity, which has not happened.
Is it safe to buy private equity stocks dip?
The ongoing stock market crash has affected companies in the private equity industry. Still, there are chances that these companies will bounce back once the market moves out of the fear zone.
One potential reason is that these companies now sit on $2.8 trillion in dry powder, a figure that refers to cash raised but not spent. It has become difficult for these companies to buy firms because of the market valuations. Therefore, these firms may use the dip to buy good companies at a lower price. In a note, one Hamilton Lane analyst said:
“History shows clearly that those are the periods when private markets, particularly private equity, outperform by the greatest amount.”
Further, these private equity companies have been in the business for decades. They have gone through worse market conditions before, including during the pandemic and the Global Financial Crisis.
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