Investing in America in a Post-Globalized World (Part 2)¹

In our previous article, we explored pain points affecting the global supply chain. Companies are grappling with production delays, overwhelmed ports and policy changes shaped by new geopolitical crises. While risks abound, investors can find attractive opportunities as companies and capital shift to domestic production.

In discussions with our sponsors, we asked how they believe domestic investments might benefit and which international opportunities may face a greater risk of capital impairment. Four themes emerged in our conversations.

1. Identify the beneficiaries in the return to U.S. manufacturing.

Major companies like Honeywell, Boeing, and Intel are investing in onshore and near-shore production facilities, betting on a long-term hedge against international disruptions. This creates second-order derivative opportunities in private markets.

For example, real estate investors can see opportunity as these companies look to expand their presence in markets with a skilled workforce, low taxes and good schools. This opportunity builds on the pre-pandemic tailwinds of population growth in markets like the southeast of the U.S.

One of our longstanding joint venture sponsors has seen a continued trend of companies scaling their footprint in markets like Atlanta, Charleston and Nashville. “We've seen a decade-long trend of people moving from major coastal cities in the U.S. to the southeast,” said the firm's founder. “While the market has gotten more competitive, we don't see the trend slowing down.”

Even though some institutional investors have been increasing their exposure to the southeast region by acquiring existing multifamily assets - which has made pricing more competitive for investors, there are other ways to benefit from this shift. Our sponsor mentioned above has pivoted its approach to focus more on the development of new properties.

2. Look for companies with sound sourcing strategies.

For companies navigating the supply chain challenges mentioned above, the winners will be the ones who can adapt. One of our lower-middle market private equity partners has focused on companies willing to move quickly and shift their strategies to prioritize access to materials, strong vendor relationships and an openness to innovate.

“We have companies re-designing products in three months to meet customers' needs,” said the firm's president. “We're telling every company in our portfolio to strengthen their relationships with key vendors and build the trust needed to navigate these pain points.”

3. Identify domestic winners in politically sensitive industries.

Many investors are assessing the economic impacts of rising geopolitical tensions with countries like China and Russia. In this new environment, domestic brands might have a new path to growth. For example, a leading growth equity sponsor, and long-time partner of our team, has benefited from U.S. regulations in the drone industry through their investment in Skydio.

Over the past ten years, the industry has been dominated by DJI, a Chinese-based company. But facing challenges related to human rights and access to sensitive data regarding critical infrastructure, the company was banned from government contracts by the Trump administration. More recently, under the Biden administration, the Treasury Department also banned U.S.-domiciled investors from investing in DJI, opening greater opportunity for a U.S.-based industry.

Enter Skydio, a U.S. company developing AI-powered drones that also benefits from using American-made chips. As DJI has lost domestic access and investment and faced increased scrutiny, Skydio has been able to grow its market share, quickly becoming the first U.S. drone manufacturer to be valued at over $1 billion. With investment from top VCs including a16z, Accel and Linse Capital, Skydio continues to innovate, expanding its AI capabilities and pushing the category forward.

4. Avoid undue risk in international opportunities.

The fourth theme is a useful reminder as investors reset expectations and reassess risk. For decades, investing abroad was often seen as an opportunity for outsized growth on the back of rapid development. But the rules have changed.

The promise of high returns now can come with greater geopolitical and logistical risk. And it's important to ask: Why are you so fortunate to invest in this opportunity? Has local capital reviewed this deal and already passed? And what protections do you have if things go wrong?

We believe this deglobalization shift will have implications for years to come. As this shift evolves, it raises more significant questions about its lasting impacts. How will inflation evolve? Which markets and industries face the most significant risks? Where do wages go? And where will consumers feel the pain most?

Today, we believe the tensions of globalization will continue to make domestic strategies more attractive. For investors, this means an opportunity to avoid the rising risks of international investment and discover new strengths in our domestic market. The result may be giving “Made in America” a new kind of economic upside for those who know where to look.