Private Credit Resilience in Uncertain Times: The Impact of Tariffs

The announcements and aftermath of Liberation Day have introduced significant uncertainty across markets and asset classes. Daily changes to proposed tariff policies have made it increasingly difficult to forecast the investment landscape. Economists have largely revised U.S. GDP forecasts, increasing the likelihood of a recession and potentially stagflation. With the outlook unclear, investment managers and clients are naturally thinking about unforeseen risks in their portfolios.

It begs the question: how can we find comfort amidst the chaos?  

Nicola Wealth, like many of our direct-lending partners, is developing our tariff playbook in real time. Fortunately, private credit and direct lending, when done right, can offer resilience through macroeconomic cycles.

First and foremost, the Nicola Private Debt Fund is invested in a portfolio predominantly comprised of priority-ranking senior secured loans to profitable middle market companies owned by private equity sponsors. Structurally, these loans are advantageously positioned in each company’s capital structure and first in line for repayment in the event of a default. This structural seniority, alongside strong credit documentation, is our safety net. While we don’t rely on it, it’s certainly nice to know it’s there.

Beyond this structural protection, the art of credit underwriting involves a deep dive into business fundamentals. When underwriting a new credit investment, the diligence process includes forecasting the borrower’s financial health in a punitive downside scenario, modelled to mimic adverse or unexpected events. This downside case could reflect anything from a prolonged recession (impacting demand), the loss of one or more large customers, a shock to the supply chain, or management failures, amongst other scenarios. Our decision to lend requires us to get comfortable with the borrower’s ability to repay the loan at (or prior to) its maturity in the adverse downside case that we design. Ultimately, we are looking to build an “all-weather” portfolio, selecting loans and borrowers that continue to perform in the event of unexpected and challenging circumstances.

The Borrower Wish List

While the perfect credit may not exist, we do have a “wish list” of criteria and primarily look for borrowers that are, in our view, “down the fairway.” Notably, borrowers are believed to be more resilient and better prepared to withstand market shocks if they (to provide just a few examples) operate in non-cyclical sectors and cater to non-cyclical end-markets, have minimal customer concentration and are diversified across supply chains, enjoy strong recurring cash flows, sticky revenue streams and high customer retention rates, or perhaps they’ve already proven their ability to survive periods of volatility (as with COVID or the Great Financial Crisis).

Beyond borrower-specific criteria, we also diligence the private equity owner and lead lender of any transaction. Private equity owners should be reputable and have measurable track records. We want to work alongside PE firms that have deep pockets to shore up capital when needed, have a demonstrated history of supporting their portfolio companies, and have been known to do the right thing in challenging circumstances. On the lender front, we typically look to align with strong leaders who will hold the borrower accountable and safeguard lender group protections.

While it can be challenging to have it all, these criteria help guide credit decisions to build a naturally robust portfolio, potentially defensive in nature, with material downside protection. Importantly, this approach to due diligence and investment underwriting has been part of our process long before the overhaul of global tariff policy.

Credit sourcing and underwriting are critical differentiators when building a private credit portfolio. In good times, private credit funds will deliver strong performance with little manager dispersion; funds that take outsized risk may be able to outperform funds with more conservative risk appetites. In bad times, manager dispersion widens, as managers who have underwritten riskier credit investments will be more susceptible to losses.

Enter Liberation Day

Arguably, few (if any) credit underwriters would have forecast global tariffs upending the economy into last year’s downside scenario modelling. Though Trump telegraphed tariffs during his 2024 presidential campaign, the magnitude of Liberation Day was on nobody’s 2025 BINGO card.

Nonetheless, the tariff impact, like COVID or the Great Financial Crisis, can perhaps be characterized as just another adverse, unforeseen credit event. Theoretically, “all-weather” private credit portfolios should be fundamentally designed to withstand some of the forthcoming pain. While the real impact of tariffs has yet to materialize in GDP growth and economic data, we can predict at least some of the negative impacts of tariffs on middle-market companies. For example, the probability of a U.S. recession has likely increased, which would depress demand for goods and services; sustained inflation could further depress demand, while higher input and labour costs could lead to profit margin compression and force borrowers to operate with more limited liquidity. Borrowers with exposure to an immigrant labour force or government contracts are potentially more at risk. Borrowers that rely more heavily on a global customer base or global supply chains may also need to re-evaluate manufacturing footprints.

While it’s a lot to digest, the truth is that a defensive approach to portfolio construction—including conservative credit underwriting, downside case modelling, and robust due diligence—should mitigate some of the tariff risk. Even with exposure to borrowers somewhat impacted by tariffs, we believe private credit, particularly senior direct lending, will emerge resilient. After all, senior secured loans have a priority lien on the assets and cash flows of the business to which they lend. Credit documentation ensures protections are in place to identify liquidity concerns long before they occur. The private equity firms that own our borrowers are typically cash-rich and eager to see their investment succeed. Moreover, private credit funds with well-constructed portfolios of loans should be highly diversified, limiting the impact of any individually impacted credit on portfolio returns. For example, no single loan in the Nicola Private Debt Fund represents more than 3.0% of our fund’s net asset value.

Until the dust settles on tariff policy, fund managers have largely adopted a defensive approach to portfolio management and monitoring, diving into direct lending portfolios line by line to identify borrowers facing potential tariff risk (typically ranked in some form or fashion). Borrowers that have the ability to pass through higher production costs will outperform those who cannot, while borrowers who sell primarily technology or services may face no tariff impact whatsoever. Borrowers with global customer bases and sole-sourced supply chains are more likely to feel the most near-term pain. Regardless of the circumstances, we continue to believe well-structured credits with defensive characteristics, strong management teams, and healthy private equity owners will weather the storm.

Building Resilient Portfolios

If you’d like to learn more about how Nicola Wealth is navigating market shifts through thoughtful selection and active portfolio management, reach out to your Wealth Advisor or visit https://nicolawealth.com/private-capital.