The recession alarms are ringing—and they’re only getting louder. In April 2025, economists from Goldman Sachs said they see a 65% chance of a US recession in the next 12 months, and Apollo’s chief economist raised those odds to 90%. Of course, no one has a crystal ball, but the possibility of a tariff-induced recession seems more and more likely as the Trump administration doubles down on tariff policies and the trade war with China escalates.
What does that mean for private equity sponsors looking to mitigate risk in their portfolios? The good news is that, in many ways, we’ve been here before. Only a few years ago, we navigated COVID era uncertainty that gave us a playbook for reducing stress and preventing distress. For the most part, this playbook still applies.
The major difference between the 2022 playbook and the 2025 one, however, is the renewed focus on sourcing (alongside the other operational improvements). While some sponsors and portfolio companies took President Trump at his word and proactively began transitioning facilities, logistics, and goods production to alternative Asia-based countries, many others took a “wait-and-see” approach—and are finding that their scenario plans are ill-equipped to address the nature of the tariffs.
The bottom line: There’s a proven playbook for navigating a private equity market of certain uncertainty, albeit with a few tweaks to reflect this uncharted tariff landscape. Here are 5 ways that you can protect and create value in a tariff-induced recession:
Keep liquidity liquid
Liquidity is essential to company viability, particularly in the short term. Never has the saying “cash is king” been truer than in a tariff-induced recessionary economy. Understanding liquidity needs means getting a realistic picture of the granular inflows and outflows of the business, as well as working capital. Gone are the days when historical trends could accurately predict current or future revenues, expenses, or cash requirements. Much like the COVID era, today’s environment means that all companies must regularly forecast and monitor cash flow and use more sophisticated modeling techniques to understand business drivers. This approach will provide realistic expectations for liquidity needs and early warnings of any potential shortfalls while there is adequate time for remedial actions.
Forecast, forecast, forecast
The required insight into liquidity places a much greater priority on forecast accuracy, in all its forms. Enter: the 13-week cash flow—but perhaps not the one you know. A typical version of the 13-week cash flow is primarily for companies that aren’t meeting expectations based on projected performance, and uses static inputs from Treasury to create a liquidity outlook over a finite, few-weeks period of time. It’s premised on specific assumptive data used for singular scenario planning.
The 13-week cash flow that should be used in a recessionary economy, however, understands that market realities are volatile and uncertain—and that there are no reliable projections. That means cash flow analysis should be oriented less toward restructuring and more toward ensuring your companies have the cash in their pocket to navigate the financial and operational disruptions that arise. As such, CFOs should:
- Model, not forecast: Go beyond static forecasting by using a dynamic, automated model that allows management to test “what-if” scenarios—like sudden changes in revenue, supplier costs, or disbursement timing—so that they can manage liquidity proactively.
- Use cross-functional inputs, not just Treasury: Treasury is a critical stakeholder, but when it’s the only stakeholder, the analysis is one-dimensional—and liquidity decisions in a tariff-driven recession shouldn’t be siloed. Inputs from Finance, Procurement, Sales, HR, IT, and more should all be considered.
- Forego traditional timelines: The 13-week period is appropriate for a typical restructuring situation, but falls short in a prolonged or uncertain downturn. Use a model that can flex up or down from 13 to 52 weeks, enabling a more holistic and longer-term view of company liquidity while still answering the urgent daily cash planning questions (e.g., Can we make payroll?).
Re-align sourcing strategy
With the tariff directives an explicit effort to swing the pendulum back toward “made in America” manufacturing, there’s a lot of buzz around reshoring to the US. The reality is, however, that that’s not where PE-backed companies are headed. In addition to the facility, expertise, and quality assurance limitations in America, hold periods are only 4-5 years—which means you’re likely not going to invest the time or capital to move operations to America when you won’t see the ROI.
What you should invest in, however, is a tariff impact analysis that helps you understand exactly how your portfolio is being exposed to current and potential tariffs, both by country and product. From there, you can identify the specific SC&O strategies to mitigate impact—which more than likely includes seeking alternative sourcing locations. Companies with real dependencies on and exposure to China, for example, should look at other Asia-based countries that have been vocal about making trade deals (think Vietnam).
And as we’ve seen, the tariff landscape can change on a dime. That means CFOs must diligently scenario plan (“if this country gets tariffed about X, we’ll do Y”). They’ll need to create multiple scenario plans to address various “what-if” situations, thinking through alternative locations that live at the intersection of labor arbitrage, infrastructure capabilities, and relatively low tariffs (think countries in South America).
Spy on spend
Companies navigating a dynamic and inflationary marketplace need increased visibility around strategic and non-strategic spend. The key here is understanding the drivers of spend and the broader organizational priorities. A zero-based budgeting approach to enterprise-wide spend can help inform the latter. Too often, spend is prioritized by divisional or functional goals. A CFO-led approach can filter priorities by organizational objectives rather than divisional ones, recognizing that a dollar spent in sales enablement, for example, will be twice as valuable as a dollar spent in marketing.
Measure, measure, measure
Organizations in this tariff-induced recessionary economy need to enhance and maintain liquidity—and that means they must measure. Even companies with significant liquidity runway must be disciplined about measuring cash flow and working capital given the inflationary environment and inherent volatility that businesses are facing today. That measurement starts with a cash flow forecast, but it needn’t end there. Given the importance of visibility, companies in the 2025 economy should extend their exercises to 26 and 52 weeks and should ensure that forecasts not only reconcile to annual budgets and financial projections, but are continuously updated.
Thriving in, or even surviving, a tariff-induced recessionary economy will be no small feat. Sponsors can help portfolio company management navigate this complicated landscape by borrowing a page from the COVID era playbook. Though we have outlined them separately, the five focus areas all fall neatly under one headline: contingency planning. In 2025, contingency planning will be key, not just to navigating a crisis in private equity sponsors’ portfolios, but to proactively avoiding one.