As global geopolitical tensions intensify and tariff policy become more unpredictable, the private equity (PE) investors we have discussions with are increasingly reassessing sector exposure.
Capital that once flowed into manufacturing-heavy and internationally dependent industries is beginning to pivot toward domestically anchored service sectors.
It’s a pivot designed to mitigate volatility and preserve deal value.
The Trade Risk Reassessment and a Shift of Capital to Services
Recent U.S. tariff escalations have placed pressure on cost structures for companies operating in sectors like industrial manufacturing, consumer electronics, and automotive components. They’ve also introduced uncertainty around raw material costs and delivery timelines. Taken together, these factors weaken what investors had found appealing about the sectors: namely, scale potential and margin expansion opportunities.
In contrast, service-based sectors—particularly those less tethered to global supply chains—are emerging as a haven for capital. Healthcare services, business process outsourcing (BPO), and IT consulting are increasingly attractive. These sectors all boast:
- Recurring revenues
- Scalable platforms
- Lower exposure to material costs
Healthcare in particular stands out. In 2024, private equity firms completed over 1,000 healthcare deals in the U.S., including 166 leveraged buyouts and 621 add-on acquisitions. Subsectors like behavioral health, outpatient care, and home health services have seen consistent add-on activity, driven by favorable reimbursement trends and a growing addressable market.
Another sector to watch is government services contractors, especially in IT modernization, cybersecurity, and defense logistics. Though the current administration’s stance doesn’t support increased federal spending, there has been recent bipartisan fiscal support for investments vital to national security. Firms like Veritas Capital and Arlington Capital Partners have been active acquirers in this niche, viewing geopolitical tension not as a risk, but as a tailwind.
Likely Trends Ahead
Looking forward, we’re likely to see two paths for investors.
On the first path, look for investors with more patient return horizons and a capacity for greater operational complexity to target those industrials that may benefit from reshoring trends and domestic production incentives (think the CHIPS and Science Act).
On the second path, we expect investors to place higher premiums on those companies with localized operations, limited exposure to international trade policy, and predictable cash flows.
In this environment, private equity’s pivot toward services isn’t just a defensive move—it’s a recognition that in uncertain times, simplicity, stability, and scalability are the new hallmarks of value.
