Private Equity’s Response to Tariffs: Insights with Beacon Global Strategies’ Michael Allen

[00:00:00] Lloyd Metz: Get ready to peer behind the curtain of the private equity universe with each episode of best but Never final. Hi, I'm Lloyd Metz, joined by Doug McCormick and Sean Mooney. Together we'll navigate the corridors of private equity, revealing the uncommon knowledge, challenges, successes, and lessons that drive the world of private equity and business forward.

[00:00:30] Let's go.

[00:00:37] Sean Mooney: It is great to be back with Lloyd and Doug. Doug and Lloyd, how are you?

[00:00:41] Lloyd Metz: Hey Sean. Hey, Doug. Good. See you.

[00:00:45] Sean Mooney: There's a few things going on these days, I'm guessing, right? Didn't

[00:00:48] Lloyd Metz: notice.

[00:00:50] Doug McCormick: Spring break. Spring break, yeah.

[00:00:51] Sean Mooney: Yeah. Yeah. So this is probably gonna be a more kind of serious and timely episodes. Lloyd and Doug and I were talking about the thing that's on everyone's minds right now and probably across the entire globe.

[00:01:05] And it was the whole concept and topic of tariffs. We 2.0 and 3.0 and 4.0 kind of working the way through. We talked about is there someone that we could bring on that could help us understand the state of play here? And Lloyd said, I've got an idea. And so maybe with that, what I'll do is I'll pass the baton on to Lloyd to make introductions.

[00:01:27] Lloyd Metz: Thanks Sean. Really excited to have on this episode as a guest, an expert, but a friend and partner, Michael Allen who is one of the Co-founders of Beacon Global Strategies and a Partner & Managing Director.

[00:01:42] Michael has a great perspective as he has spent his career in Washington, in the White House and on various committees regarding intelligence and the private sector. Great. Great mind on this topic and really excited to have him join us. Michael, thank you for coming. Tell us a little bit more about your background and the experiences that you've gone through that give you this great insight and purview.

[00:02:11] Michael Allen: Everybody, thanks so much for the opportunity, and Lloyd, thanks for the invitation. Yeah, I mean, I've been at Beacon for 12 years, but I got outta law school and went to work for President Bush. I worked for him for both of his terms, seven in the White House, mostly doing National Security Council work, and then came out.

[00:02:34] Took a couple of years at a think tank and then went up and worked in the Congress and was the majority staff director of the House Intelligence Committee. So we sort of oversaw and did the budget for C-I-A-N-S-A and all the other elements that we call the intelligence community in Washington. And then I got together with a few other people and.

[00:02:54] We decided that we wanted to put together a national security foreign policy, geopolitical risk advisory firm, and that's where we came up with the idea for Beacon Global Strategies. And we've been at this for a while. And of course we have a terrific relationship with Lloyd and his firm, ICV. And anyway, we're happy to talk about these issues.

[00:03:15] This is what we do at work all the time is try and study these. And so it's good to have the opportunity to discuss them.

[00:03:22] Sean Mooney: Great. Well, I think this is a, I think a really unique opportunity for a lot of us to understand what happens behind the scenes. So I'm really grateful for you to spend time with us.

[00:03:31] Lloyd, do you wanna kick us off maybe in terms of where would you like to go first here?

[00:03:35] Lloyd Metz: Honestly, Michael, if, if you could just help us understand what is the current state of play? It seems to change from week to week, day to day, but give us some perspective on sort of where are we? What's the original plan?

[00:03:50] What's the intention? Just maybe start there.

[00:03:53] Michael Allen: I'll definitely get into tariffs, but let me just lay out what I think you already know, but might be a useful scene setter just in terms of what the world economy is currently looking at. And that's a wide distribution of possible outcomes on many key policy issues.

[00:04:10] So first it's of course, tariffs, but look at the turmoil around the Federal Reserve and will Trump try. Fire Jerome Powell and what will the rates be? We are in our Congress working through an enormous tax bill to redo the Trump tax cuts. We're in the middle of the Doge, which loosely we'll call public sector reform.

[00:04:34] We are wading through at least 90 countries, reactions to especially tariffs, but many of these other issues. We're in the age of productivity enhancing inventions like ai and others we're worried about the functioning of the financial market, especially the bond market of late, and the international trading system is under pressure.

[00:04:58] And finally, what we really talk about a lot at this firm are geopolitical conditions around the globe. And we have tensions in the three main theaters. So think Russia, the Middle East, and China. Asia, particularly with China, and so there's just so much going on. And then you put a new president in Donald Trump who feels like he has a mandate to make enormous economic changes across the board.

[00:05:29] And he told us what he was gonna do. He said he loved tariffs and throughout the campaign he told us all the reasons he loved them. It was gonna him more revenue. It would force a decoupling with China. He wants to, in his words, recreate manufacturing here in the United States. And finally he wanted to reduce the trade deficit no matter what economists think about whether that's the appropriate metric to weigh a trading relationship with another country.

[00:06:04] So that's a wide breadth of issues. That the country is sorting through right now that has particular bearing on the global economy, but on tariffs in particular, even though Trump warned us he was gonna do it, and he explained why he liked tariffs in terms of revenue, the trade deficit, trying to reduce it, trying to make manufacturing come back into the United States.

[00:06:30] Nonetheless, I think it was still a shock. To the global system, and many of us who watched this, how far and how deep Trump went early on tariffs. He went of course against Mexico and Canada, but then seemed to work a few things out and then really started to go against China. He declared Liberation Day and really went the max on a series of tariffs against many of our allies across the world.

[00:07:01] Some that aren't our allies, but in any event, I think you've all seen the story. He felt pressure apparently from many people in Wall Street. I think he wasn't as moved so much by the stock market as he was by the bond market, and he ratcheted everything down. Where we stand today though, is that he's kept the tariffs on China.

[00:07:25] That was always his noir, the people he wanted to go up against the most. Also as the Trump US trade representatives were saying in a meeting today, this, no matter what you think of Donald Trump, is a historic, unique moment in history because over 90 days, or in least in the medium term, we're gonna be negotiating bilateral, let's call it term sheets, and then maybe new trade agreements with as many as 90 countries around the globe.

[00:07:58] So if we have stubborn old tariff or non-tariff barrier issues that have been around for many, many decades now, just might be the time to raise those to the attention of the president's trade negotiators and try and make some progress. So this is destabilizing. I know the countries are nervous about it.

[00:08:20] Certainly companies all over the world are nervous about it, and there's plenty of anecdotes about that, but I know you know that. Given that y'all are from that world, but it's fair to say that even though there is a ton of risk out there right now, there might be also some strategic opportunities for the United States to make some progress on sort of bilateral trade agreements with a variety of countries around the globe.

[00:08:45] Sorry, that was a big wind up there.

[00:08:48] Lloyd Metz: Wind up. Let just start with day. Is it your view that this is to buy time, to cut deals and negotiate with countries? That's what they're telling us. Even before

[00:09:04] Michael Allen: Trump called off the so-called reciprocity tariffs that came out of liberation day. Even before he called those off, they were signaling that they were gonna begin to work through, starting with, remember it was Japan and then it was Korea.

[00:09:21] We had Netanyahu fly in and say he was gonna preemptively lift all tariffs, at least on automobiles, but maybe everything, if I recall, the UK was in the mix and even India was in the mix. So already I think everybody was thinking, you know what? It feels like what we're gonna do here, his work country by country, while they're under these tariffs.

[00:09:41] People got nervous and we yanked the tariffs off of everybody but China. But yeah, I think that is the way to go. In the short to medium term to begin to, during the 90 day pause, settle all family business with a lot of these countries. You saw Trump Tweet Sunday night. He doesn't mean just tariff stuff.

[00:10:02] He doesn't like digital sales taxes, he doesn't like currency manipulation. There's all sorts of things that he want. He talks about the European unions, what he would think are excessive. Safety regulations that effectively lock out US goods. So I think there's a lot of stuff in the basket that Trump wants to be able to go and work out with these other countries during the pause.

[00:10:31] Doug McCormick: So Michael, he's certainly got everybody's attention. And do you think it's plausible that like can they make that much progress in 90 days, or at least have a term sheet or something where you've got an agreement in principle. And does that happen all at once with like the 90 countries, or do you think they start rolling in here over the next 90 days where they're gonna announce trade agreements as they make progress?

[00:10:52] Michael Allen: I think they're just gonna come one by one. I know the Japanese are coming next week. I do think it'll be a term sheet arrangement. I do think they can get a lot of them done in 90 days, but I think then they'll just extend it again.

[00:11:05] Doug McCormick: So if they're making progress,

[00:11:07] Michael Allen: yes, they're making progress. They're gonna have out roll these.

[00:11:12] Wanna roll 'em out one by one, or maybe they announced five to 10. We're hoping to have a good strategy around this to isolate the Chinese if we're keeping the tariffs on the Chinese. And those were the ones who sort of exploited, as we all know, the goodwill of the world community by letting them into the international trading system.

[00:11:34] And then we gave them this enormous head start for them to become a market economy, which they didn't. And steal all of our intellectual property and eventually all of our manufacturing jobs. The right way to go about this is to say, Hey, European Union, let's team up together and coordinate. I hope Trump does that.

[00:11:54] He's got a lot of beefs with the European Union, but at a minimum, I hope he's begins with Japan, Korea. We don't even really have any big trade or non tariff issues with the Australians. So why don't we start to. Get along with reach strategic agreements with geopolitical partners or people that we're trying to recruit onto our side in this global competition that we're in with China, and then go from there.

[00:12:23] I think that's the most sensible way forward in, I hope that's the plan.

[00:12:29] Sean Mooney: Michael, to what degree do you think there is a plan? Is there a broad strategy here in which this is one of the tactics, multifaceted versus maybe. More, it seems like from the outside that it's a shock and awe and there's all these things happening and we're kind of reacting in real time, but it's not clear that there is a plan or not.

[00:12:47] There may or may not be.

[00:12:48] Michael Allen: I totally agree with you. I think it's really important for presidents, and this was a big problem with President Biden, I don't think he could physically articulate anymore. You know, what is our China policy or what's our strategy? Trump is talking to the media all the time. I don't think he likes the set peace speeches.

[00:13:07] We could really stand to hear just what the strategy is. Some of his cabinet officers try to say, Hey, listen, it's about deregulation, it's about extension of the tax guts, actually making them deeper in a couple of areas, and it's about fixing our trade relationships across the globe. And over time we're gonna have a booming economy.

[00:13:25] I mean, if they could just give a couple of speeches like that and maybe clue us all in to what the plan is, I think a lot of people would feel a lot better about it. Maybe that helps with the market. Maybe it doesn't. I would feel better if I felt like they had a good plan and were communicating it to us.

[00:13:42] But yeah, 'cause sometimes I feel like a lot of this is totally ad hoc. I really believed that Trump was gonna keep the so-called Liberation Day reciprocal tariffs on for a longer period of time because he was signaling to CEOs from the business round table and elsewhere that he was willing to take a hit on economic growth and even on the stock market.

[00:14:05] To make sure that he had gained what he loves the most, which is leverage over a lot of nations to go forward. He had to pull that back with the bond market or so were to believe. But I, I hear you. I would feel better if we had a plan.

[00:14:18] Doug McCormick: And Michael, I'm curious, how do you look at Trump's authority here and how time influences leverage?

[00:14:24] I think I could make arguments. The time is his friend and I could make arguments. The time is his enemy. How do you see that?

[00:14:30] Michael Allen: It's anybody's guess on China. There are articles on either side of the ledger coming out right now. I kind of think time is on the side of the Chinese in this particular fight because it's a different kind of political system over there.

[00:14:45] I mean, they can't ignore the people forever, but at the same time, I think they have the capacity to take a lot more pain than we do. So I kind of think the Chinese time may help for them. You all would know better with your economic backgrounds, but I don't know that time is working for Trump on any of the other deals either, because what I keep hearing is the uncertainty.

[00:15:11] It's gonna cause new inflation. And all I do is hear every time I turn on a business channel that a new gigantic bank has forecast a recession. So if I were him, I would move briskly through all of these. Then figure out what we're gonna do with the Chinese.

[00:15:33] Doug McCormick: Just curious, as you think about watching all this play out, I think the big surprise for me is the currency moves and demand for dollar.

[00:15:41] And so in some ways this is a tariff discussion that's turned into a foreign currency and interest rate policy discussion. Any learnings or observations from that give you conviction in the strategy?

[00:15:56] Michael Allen: And feels threatened by any suggestion that the dollar would not remain as the world reserve currency. So I do think that he's very sensitive to that, like apparently he is to the bond market. So I do think that ultimately is something that can motivate him one way or the other. I do worry though, and I think this is what you're getting at, that they're open to devaluing the dollar.

[00:16:24] 'cause they think it will help with the trade deficit. I have heard economists argue on either side of it. I can't profess to be an expert here, but it does sound part of a witch's brew of macroeconomic factors that may conspire to put us into a recession or otherwise also probably cause us to have higher inflation.

[00:16:48] I think that's why people have started to say stagflation again recently. But I'm just trying to study the Washington side of this and may need to leave this to you all. Who are the real business people around here,

[00:17:02] Sean Mooney: Michael? Who do we think are the decision makers in the room on this part of their, we'll call it a strategy.

[00:17:08] Michael Allen: There's this huge Washington game of, and I love it, of who's on which side, and there's factions. It's Peter Navarro versus Scott Scent, and people love talking about this. But Donald Trump is making all the decisions, not just on trade policy, by the way, but Iran policy, Russia, Ukraine, he loves being president.

[00:17:34] He loves making decisions. He's always there. He doesn't go away to a ranch in Texas or to the Delaware Beach house for the weekend. He's always around members of Congress and staff. Even when he goes to Mar-a-Lago. I think people are bringing him decisions all the time and he's enjoying himself. And so I even heard someone say this in the government, which is if you really wanna try and engage and influence US trade policy, ultimately you need to get to the president of the United States.

[00:18:04] Now there's other things these government offices can do, and that's part of what Beacon helps with, which is to facilitate what companies are looking for from our government. And we love doing that and love working with the government on what the right thing is for the United States and our companies and the rest.

[00:18:23] But ultimately, at the end of the day, Trump is not delegating many decisions out there. He's in the middle of it all.

[00:18:30] Lloyd Metz: Wow. And so, stepping back for a second and putting yourself in the shoes of the business owner, senior executives or CEOs at companies. Is there anything you think they should be doing in the next 70 some odd days, or if there's an extension for another 90 days, should folks be kind of standing pat or should they be making contingency plans?

[00:18:53] What would you suggest they do during this short period here?

[00:18:57] Michael Allen: Yeah, I mean, this is tough. I know a lot of people began to make contingency plans anticipating that we would have a huge trade war with China. I know a lot of companies were stockpiling. I know the Chinese were stockpiling semiconductors and other things as well.

[00:19:12] So I imagine soon, if not already, a lot of companies have begun to run out of whatever they were stockpiling it. We want companies to diversify their supply chains. And of course this has been a big topic in Washington, at least since Trump's first term. And it was a huge topic during Covid when personal protective gear and the rest, we weren't making it in the United States and we really needed it.

[00:19:41] But I think there are a lot of supply chain issues. Um, apple probably being the biggest example where it's easier said than done to get your supply chain outta China. I know that companies writ large are thinking about how to do that a lot. Moved their supply chains to Mexico and Vietnam, and of course I think the Trump administration is viewing that as transshipment or circumvention around trade as well.

[00:20:10] And so they're probably confounded now, but I think we've gotta get clarity sooner rather than later on just what we're doing with China. Scott said today he seemed to signal. That maybe we would come to some sort of agreement with the Chinese sooner rather than later. That seemed to help the stock market today, but they're both looking at each other and not blinking.

[00:20:33] I think the US position is, is that we've signaled that we're open to a phone call, but we're not gonna go ask for a phone call between Xi Jinping and Trump. There's even talk about them not even meeting until September or October. When the G seven meets, which as I understand it, I believe is in Korea this year, and Trump would be in the neighborhood, so to speak.

[00:20:52] So we're gonna have to get some sort of clarity though long before that because too many businesses depend on goods that are made in China, and some of these supply chains are not coming back. I mean, I see memes on this on X all the time. I don't think a lot of Americans are interested in making clothes and tennis shoes and the rest.

[00:21:15] So we're gonna have to work through, well, maybe if we're gonna decouple from China, it should really just be on strategic important goods that we really, really need. So we've learned about pharmaceuticals, ships, personal protective gear, semiconductor parts, rare earth minerals. There are a lot of strategic things.

[00:21:37] We need all kinds of. Metals and stuff, but maybe not for every textile, maybe not for every consumer good. Maybe not for every consumer electronics device. So I think we've gotta figure out a way to split the baby here. I get that he wants to truly effectuate decoupling. We're no longer in this de-risk thing, but I think it's gonna have to be a strategic decouple and not an everything decouple.

[00:22:04] Sean Mooney: Is there a kind of a bread Woods 2.0 that comes out of this, or is it kind of, it takes place one deal at a time at the end of the day, that's recreated almost in this organic process versus everyone coming together and saying, this is how the world operates from now on.

[00:22:19] Michael Allen: I think it's not gonna be everyone coming together in a big way, at least as long as Trump is president.

[00:22:25] I think he knows leverage. He prefers bilateral discussions 'cause he can maximize his leverage in that setting. We were having trouble in the multilateral trade agreement real anyway. I mean, we made no progress hardly. Well, we got an agreement on TPP, but nobody was able to ratify it. The Doha round wasn't exactly going well.

[00:22:48] So the WTO is suffering from all sorts of other problems. There is talk of a Mar-a-Lago Accord where we get together and talk about currency, but I think that. Has been extinguished as an idea for now, at least in the short to medium term. So globalization is mostly on the downturn right now, so I wouldn't expect anyone to get together in a big Bretton Woods type agreement.

[00:23:14] Doug McCormick: I think that's a really interesting insight 'cause it fundamentally, I think is reflective of the US position. So 50 years ago, I think you could make arguments. The US was best served by creating that framework globally. And now I think Trump's conclusion is I can extract more value that accrues to the US quite possibly at the expense of the counterparty through individual bilateral negotiation.

[00:23:36] Right. And so it's, is it maximizing like global outcome versus US outcome?

[00:23:41] Michael Allen: I think you're right. And globalization is a bad name right now. I mean, there are a lot of people who whisper these days that the United States grew enormously during globalization. But the costs were very, very high. And so no one I think is interested as you talk about Doug going back in that direction right now.

[00:24:01] And I think Trump's all about bilateral agreements for the foreseeable future.

[00:24:05] Sean Mooney: I was talking with one of the top tariff advisory firms in our ecosystem just last week, and his line was very succinct. Globalism is dead, mercantilism is back. Like get ready. And so I think would be helpful here as part of bringing our conversation.

[00:24:24] It would be great to get kind of almost a microeconomic discussion on what these tariff policies are doing in real time on the ground with portfolio companies. So Lloyd and Doug, do you wanna say a little bit about like what's happening as a result of this in terms of all the different things that are starting to ripple through the economy, through your portfolio companies at the ground level right now,

[00:24:50] Lloyd Metz: some of companies.

[00:24:52] Many of them are domestic service oriented businesses. You're starting to see their customers who are more consumer facing start to pull back on certain expenditures that are service oriented, let's say marketing services, right? Where the customers are saying, I don't know what the tariff is ultimately gonna settle in at.

[00:25:17] I know it's gonna be large. I don't know what the consumer reaction will be. I don't know how to price my product, just trying to figure that out. So I'm certainly not really going to spend more on marketing or promotion or customer retention if I don't even know if they're gonna spend and consume, and therefore that has a ripple effect on some of our companies.

[00:25:43] That one comes immediately to mind, and then some of the inputs. Wind up getting a little bit complicated when you think about, okay, if I'm importing what some of our food companies oils or ingredients from outside of the us, well, that's how some of my key inputs might be going up in price and my overall input costs might be going up.

[00:26:05] So we're trying to riddle through some of those tariff and consumption impacts in our portfolio.

[00:26:12] Sean Mooney: It's really interesting because I, I think you're making an important point here, Lloyd. I think most people think this is a policy that has implications on industrial companies that make or import things, right?

[00:26:24] Or even consumer goods companies, but it does have very close kind of one degree of separation impacts even on service companies.

[00:26:32] Lloyd Metz: Correct.

[00:26:33] Sean Mooney: Doug, how about you? What are you seeing?

[00:26:35] Doug McCormick: I think I'd start with acknowledging right now I think all the activity is around tactical moves to. Think about how to ensure continuity of supply at a competitive price today.

[00:26:46] And nobody's asking the questions about long-term, what are the implications for my supply chain or my manufacturing base, because there's just no clarity, right? So this is in my mind kind of the, the next, what are people doing the next three, six, and nine months. The other thing I would say is in a kind of surprising way, I think Covid prepared people to navigate some of the choppy waters we're seeing today.

[00:27:08] And obviously the demand drivers are different, but demand. Moved around rapidly and costs moved around rapidly. Mostly driven by inbound freight at the time versus tariffs. But I think a lot of the businesses I work with understand the implications of cost of goods going up by a hundred percent, and how to think about what that's gonna do to customer demand and input costs.

[00:27:30] So it's been interesting for me to watch how quickly people are assessing what the implications are. And where there is alternative supply. Moving very quickly, you guys pointed out earlier in the discussion, there are some cases where China is the only one that has a substantive manufacturing base for certain types of products, and that just isn't movable.

[00:27:51] They're dealing with a different set of questions in the context of what's the demand profile look like when cost of goods just went up by a hundred percent or so.

[00:27:59] Sean Mooney: It's interesting. I was looking at our data and in some ways it's kind of fascinating to see these turbulent times play through 'cause you get real time case studies that just create, 'cause you get many hundreds of the world's best business building private equity firms that are bringing in needs across diligence and value creation.

[00:28:14] And it is some ways is a almost mirror reflection of what's going on. And so January very slow, kind of right after the election, February up, March booming, and so year over year activity. Was north of 10% up year over year, which first quarter last year was a huge, very active period. Most people forget, like everyone thought we were coming into it, so just that the PE was really leaning in.

[00:28:39] And then you go to the beginning of March and it's just a cliff. And so 10% up went way down. What's super quiet in the beginning of April, but now what we're seeing is that now activity is skyrocketing back up again. We're holding steady at 5% up and now picking up steam again in terms of year over year, just activity volume.

[00:28:59] And so what it kind of reflects is, I've always been a fan of Colonel John Boyd with these OODA loops is P at large. They kind of like take in information, they analyze, they decide and act, and always gets a little bit quiet when these turbulent things happen. And maybe later in the conversation, what I'd love to do is like now people play to not only for safety and security, but then success and.

[00:29:20] Maybe before we get to like how we can play the hand that's dealt, I'd love to get everyone's kind of input here on, we've seen this fact that people are maybe pulling in their sales in certain places, their sourcing implications, probably even pricing implications, supply issues. How does that start rippling through in the economy as you look at your companies in terms of more of a macro posture?

[00:29:45] Lloyd Metz: Michael, you touched on some of this. Bond market uncertainty, the Fed uncertainty, interest rate uncertainty, both from the current environment and the economic setup. There was a question as to whether rates would go lower or higher, and now you add on the Powell uncertainty and then the market volatility for the lower middle market that often shows up in your lender has finance your investments.

[00:30:14] What kind of mental state is their credit committee in and they start getting real anxious and jittery. Even if your credit is performing fine and you may need some regular way amendment, you still need to go to that lending Institution's credit committee, and they're nervous, they're anxious, and perhaps other parts of their portfolio are getting hit squarely by these tariffs.

[00:30:40] And then they start talking about capital at risk and pulling back their lending book, and you start to have that credit tightening behavior at a firm level with lenders. That's what I'm worried about today and probably for the next several weeks, and that's where it starts to show up for some of the lower middle market companies, whether you're affected directly or not, I, I don't know if you're starting to hear some of that, Doug.

[00:31:07] Doug McCormick: Michael brought up the term stagflation earlier in the conversation. I think that's a pretty interesting way to think about the environment. I mean, uncertainty, SAPs demand, right? Hard to invest, hard to have conviction about how to allocate capital with so much uncertainty. To Lloyd's point, you've got the banks who will be risk off and constraining access to capital, and at the same time, you've created an environment where by definition, you're gonna have pretty rapid rising cost of goods.

[00:31:37] And so I think you throw all that together. It's a tough combination to navigate. I think if I was trying to give you guys insights that are contrarian, I think everybody is suggesting that this is inflationary. I would tell you, I think it's gonna manifest itself very quickly. Like if you think about Covid, it kind of snuck up on us over a couple quarter period, and I think because the supply base is so dynamic and so rapid, I think those price increases are gonna flow through very quickly.

[00:32:05] So that's going to do two things. One, it's gonna create pressure on inflation, but I think we're gonna see the impacts and demand pretty quickly as well. So my only point would be, I think this is gonna play through in a relatively short period, which increases the pressure to create that clarity so people can make decisions.

[00:32:24] Lloyd Metz: Are you suggesting this won't be some lingering, long lasting uncertainty? You think we're gonna get an answer pretty quickly in terms of? What's gonna stick and how the consumer's gonna react to it.

[00:32:37] Doug McCormick: I'll put it in practical terms. We have businesses in the portfolio that have already announced cost increases that go effective sometime in May.

[00:32:46] And so if you think about how fast that is, even in the absence of real clear policy, I think people, the consumer's gonna start seeing the implications of that very quickly.

[00:32:56] Sean Mooney: It was interesting. So we were just getting ready to publish our quarterly insights report where we take all the data, here's what you all are doing, here are all the measures quarterly with economy, and then see what's going.

[00:33:06] And the great travesty of all of this is that the Trump economy that I think all of us thought we were getting was really picking up steam and reaching its stride and hustling and like everyone was like, let's go up until March 31st. And we saw. Business building value creation activity, growing dramatically, due deal activity really going up.

[00:33:30] You had debt markets open. We had the GDP was strong enough, you had inflation coming down near all time. Best unemployment rates, both the service and the manufacturing. PMI above 50, everything was happening. And then it seems like this is just one of those kind of unintended, like shoot your foot off wounds.

[00:33:51] That didn't need to be happening. And so you hope that there's some wisdom going on in DC and it feels like if they make a deal fast enough, take their wins and get back to the economic story that we all thought we were getting, get it back on track. It doesn't seem like it should be insurmountable, but the more, from what I'm hearing from you, that uncertainty reigns, the greater the impact to what we all were actually getting that we thought we were getting as of March

[00:34:16] Doug McCormick: 31st.

[00:34:17] One irony and one of the implications of this dragging out that I think people underappreciate, the irony is through covid there was this overcorrection. So people were unders supplied on a lot of things we imported in excess to catch up, and then that all manifested itself in excess supply. And retailers and a bunch of other businesses were essentially hoarding inventory to avoid stockouts.

[00:34:40] Then I think in 23 and into 24, everybody leaned out again because the supply chain had finally got predictable and there was no need to hold that excess. And so I think we kind of right, got back to the optimal kind of, uh, supply chain setup. And when we introduced this new chaos that's gonna happen again, right?

[00:34:59] So people are now avoiding purchases 'cause they don't know where to buy from because they don't know what the landed cost is gonna be. And so we are leaning out the supply chain when that's gonna create that whipsaw again. In a matter of months. I think

[00:35:11] Lloyd Metz: when I listened to what Michael has said, Sean, I'm not so sure there's going to be a get back to delivering the economy that we expected.

[00:35:21] I don't know. Michael, can you put the genie back in the bottle? It's, it sounds like there's a one way direction. Get some tariff deals cut. And it's just a question of who gets stuck with how big of a tariff and then that's what you gotta live with, right.

[00:35:36] Michael Allen: Yeah. Well, to hear you all talk about the Sure. Or certain onset of inflation, stagflation, even people talk all the time.

[00:35:47] When are the Republicans gonna stand up to Trump or when are the Republicans in Congress gonna say something? The only time I've noticed them saying anything so far was at the beginning of, or just after Liberation Day when the reciprocal tariffs went on. And I think it was easier for them to speak up because they were having issues in their districts or in their states, probably just along the lines of everything you all are discussing here.

[00:36:15] So they were able to put their hand up and say, I'm worried about what we're doing here economically, because they had backing from certainly their districts and probably a lot of Trump Republicans in their districts. If the economy gets significantly worse, I do think that is one safe place Republicans can go.

[00:36:35] Now, Trump doesn't always listen to the Congress, but if he's hearing surround sound from Wall Street, the bond market, his advisors, the Congress, everyone, that things are really getting dicey out there, maybe he then begins to change his mind. Take a variety of different measures that would be better for the economy, because I know he doesn't wanna get into Biden territory on inflation, but as I understand it, inflation is down for now.

[00:37:06] But you think, is it y'all's consensus that it's gonna pop back up soon?

[00:37:10] Doug McCormick: I think it has to.

[00:37:11] Michael Allen: So somebody's getting to Trump. I mean, I've just noticed he's just said there, I have no intentions of firing. Jerome Powell and Besson said something about. We hope to work things out with China earlier. So maybe these are small steps that people are beginning to see that he needs to temper down.

[00:37:32] 'cause the economy is really going in the wrong direction.

[00:37:36] Sean Mooney: I was talking with a friend of mine at a another PE firm and we were talking about how do you make decisions? And the answer was, clearly you can't. And if you can't make decisions, you can't invest. And I think the consensus was we can agree on a lot of what they're trying to achieve, right?

[00:37:51] Make the trade dynamics more fair, right? Because I think we give a lot of the upper hand away and have often to our detriment, and you can argue about the wisdom of exporting our supply chain particularly strategically with a new global rival. And then you can talk about having more taxes that are afraid, less deregulation.

[00:38:10] It just seems like trying to do all of this at once with, there's only so much capital to get things done politically in DC and trying to do it all at once. I think there's a concern about how we're doing it, not necessarily what they're trying to achieve.

[00:38:22] Michael Allen: Yeah. That means

[00:38:23] Lloyd Metz: so many different things at once.

[00:38:24] It's crazy. And Sean, it's interesting to hear the commentary from your friend. We've talked about this on many other episodes. One thing that's true in private equity is that that clock is ticking from the minute you close on an investment. And so not making decisions that move your company forward, build capabilities.

[00:38:46] Help that business grow, help that business become more profitable. It's hard to sit and do nothing. It's hard to not make a decision because you're always on the clock and that time is not your friend. I mean, that's just me. I don't know what you think, Doug,

[00:39:00] Doug McCormick: and it feels like a sunk cost to me. Meaning like if I have no conviction on whether to invest or disinvest, I think sometimes you're forced to wait for more clarity.

[00:39:10] The clock is ticking. You're right, and there's nothing. There's nothing you can do about it.

[00:39:14] Sean Mooney: With Lloyd and Doug and Michael also, like you're all sitting at the card table of business and life here and the cards are being dealt. You gotta play the hand. How do you play it to win right now, given what it is, what are the strategies that you can do to move the ball forward in any way you can in a time like now

[00:39:30] Michael Allen: in Washington?

[00:39:31] I think playing the win now is, is if you have issues with any other country, but China, I do think we're at a. In certainly American trade history, where no matter what you think of Trump, he's created an opportunity. He's created some space where everyone in the world is coming to him and everyone is throwing at least.

[00:39:56] So we hear term sheets at him of things that they will do in order to get the 10% reciprocal tariffs lifted and or ensure that higher tariffs don't go back on. And so I do think there is an opportunity to work some things out with some other nations. Right now, I think the best way to organize in Washington is very likely through your trade association or even through your members of Congress and the rest.

[00:40:23] And the more people that have the same issue, the better. I do think there is an opportunity, there is some space to make issues, to create other markets or to try and reduce some barriers. So that you would be able to eventually expand your exports. Playing to win I think is also more ruthless on how can you diversify your supply chain?

[00:40:46] Is there any way, is there anything at all you can do in the United States? Now, maybe you can't, and we're all familiar with some industries where it just doesn't make a lot of sense to do it. I think those are probably the ways you do it here in Washington to try and make some progress out there. On the China front though, I think it is an education process for any administration and for any congress for companies and business leaders and others to come to Washington and explain what we need outta China.

[00:41:20] It's not that we need to cut everything off between the two nations, even if we are in a bit of a cold war. It's unlike the Cold War with the Soviet Union where we had little to no economic relations. I mean, we have. Major economic relations. We, in fact, we're interdependent with China, and so I think that what Trump ultimately wants is a serious decoupling.

[00:41:45] I know he wants manufacturing back in the United States, but I think where we're gonna end up is we want high tech manufacturing coming back to the United States. We wanted in strategic areas for us to make it here in the United States. We all hear about. Chip making all the time. Semiconductors probably the issue that's gotten the most attention over the last five to 10 years, but I do think that it's part of a long-term strategy of companies around the nation to organize through your chambers of commerce and other organizations and get to Washington and educate so that the right policy outcomes are arrived at.

[00:42:25] We're in an era of populism and things are not going necessarily in the direction. That the country's businesses want them to go in. The Republican party is more blue collar than it's ever been, and so arguably companies don't have the political clout that they once did. So I think it's necessary to organize and reorganize Washington strategies for the new world and the new parties and the new politics that we find ourself in so that we don't end up with self-defeating policies.

[00:43:01] Doug McCormick: Yeah, Michael, that's super interesting context. From my perspective, I think there is a way to make money as a buyer right now in this volatile environment. So Lloyd talked about constraining capital. I think that affects all deals, but I don't think we should be looking at the deal market as a homogeneous market.

[00:43:19] I think there are lots of good domestic based businesses in recession resistant environments that are kind of isolated from global supply chains where. There's still really good thesis intact that you can get deals done and maybe at a lower leverage, but a better value. And so force yourself to find pockets of opportunity where you can still get conviction.

[00:43:38] I think people will be well compensated for doing that. The other thing I would argue is I think we have seen enough to maybe not be able to pick all the global supply winners and losers, but I think you can with some degree of confidence, convince yourself that China-based supply chain is gonna be.

[00:43:56] Negatively impacted long-term, even if it's at, if it's at the benefit of Vietnam and other parts of Asia. And so I think some of those key themes can influence the way people think about allocating capital as well.

[00:44:10] Sean Mooney: Lloyd,

[00:44:10] Lloyd Metz: how about yourself? I agree with Doug. There's gonna be opportunities in more domestic.

[00:44:18] Whether it's the us, we have an investment in Canada that services Canada only, so they're actually benefiting somewhat in the short term too. I also think there may be opportunities when you look at a lot of the major exports from the United States to China, for example, if the tariffs stay as high as they are and they stick well, a big market for our exports will have less export volumes, and so that volume will stay in the states.

[00:44:47] Or need to find some other place to go and in the short term might provide lower costs, lower prices of those export commodities. And so to the extent you find a domestic business that has some of the big agricultural, let's say domestic US exports, there may be gluts in some of those commodities, which improves the profitability if you use that as an input.

[00:45:14] We're keen on a lot of food and beverage companies right now and opportunities trying to find opportunities in that space because we think there may be some meaningful glut in agricultural commodities in the US in the near term because they won't have a market in China or East Asia because of the tariffs.

[00:45:33] Sean Mooney: It's really interesting, and even just through the advantage of what we see the collective PE industry doing, I think there's some tactical things that people can and should be doing right now that are. Really practical, right? You can use pricing strategists to help you kind of figure out where and when to push through your prices.

[00:45:49] Unfortunately, this leads to the, all the inflation we're talking about. If you are in the US where as you talk about where you have manufacturing in a largely global or non-China supply chain, the world's kind of your oyster, and so really work your sales teams to start selling out your capacity into the US 'cause it's gonna go fast if this stays in particular, particularly if you.

[00:46:10] People that are importing things from China and you've got a non-China supply chain, A lot of you, those groups, if you are getting sold out, get a Lean Six Sigma group in there that can start bringing up capacity within your companies without having to buy expensive foreign equipment. There's a whole cadre of advisors that can do these things, Michael, as you said, like procurement groups, like you can move your supply chains relatively quickly with the right advice and people who know how to do it.

[00:46:36] There's things like free trade zones and bonded warehouses where you can do that. So we did a whole report on this. If, if people wanna reach out to us, we can make it available. And the only thing else I'd add at the risk of uncomfortably, kind of flattering Michael, is they're really, really good advisors out there, like Beacon Global Strategies that get the way this world works and you don't have to like figure it out on your own.

[00:46:59] And so seek out advice from people who understand. How to navigate through rough waters versus just necessarily plowing through and hope you make it out the other side.

[00:47:08] Lloyd Metz: A lot of rough waters out there, Sean, since stagflation has been used in this conversation, that's kind of like a artifact from the seventies, right?

[00:47:17] So should we start watching seventies movies, not eighties movies? Yeah,

[00:47:23] Sean Mooney: I, I've got a whole list of some really good ones. It would bring all my quotes back, you know, the people would start understanding how I communicate again, so. That would be amazing if the whole world and the kids you coming up would start doing that.

[00:47:36] I think this has been a really helpful discussion here. There's a lot of things that are scary and uncertain, but I think within that there's also a ton of pockets of opportunity to kind of be bold and have a bias towards action and play ahead and be agile. And I think, Michael, the stuff that you shared today really helped center my kind of thinking about this.

[00:47:57] And I really like your point about if it matters to you, call your local representatives and let 'em know.

[00:48:04] Lloyd Metz: Yeah. That ultimately matters. So really appreciate your time, Michael. Yeah, thank you Michael, for the insights and, and the candor. This was super helpful.

[00:48:12] Michael Allen: Really enjoyed it anytime, and look forward to seeing y'all come visit us.

[00:48:17] All right,

[00:48:17] Lloyd Metz: thank you. Thanks, Michael.

[00:48:21] Doug McCormick: A special thanks to HCI Equity Partners, a lower middle market private equity firm focused on driving transformational growth through consolidation strategies by partnering with family and founder owned manufacturing services and distribution companies. Learn more@hciequity.com, ICV Partners and Innovative.

[00:48:42] Lower middle market private equity firm, supporting management teams of leading companies at the lower end of the middle market. Learn more about IC v@icvpartners.com. And finally, BluWave the Business Builders Network, connecting the most proactive business builders in the world with the best of the best service providers for critical variable, on point and on time due diligence and value creation needs.

[00:49:08] Learn more about BluWave at BluWave. Net for further information on H-C-I-I-C-V and BluWave and relevant topics discussed here in the episode. Please see the episode notes or links,

[00:49:22] Sean Mooney: the views and opinions expressed in this program are those of the individuals presenting and do not necessarily reflect the views or positions of any other persons or entities, including those referenced here in.

[00:49:33] No representations, warranties, financial, legal, tax, or other advice are made herein. Consult your advisors regarding any topics discussed during this episode.

Join Doug McCormick from Oridian Capital Partners, Lloyd Metz from ICV Partners, and Sean Mooney from BluWave as they explore timely private equity topics and offer their seasoned perspectives on crucial areas of focus within the industry. Gain valuable insights from these industry experts in this engaging podcast tailored for PE professionals.