A single piece of legislation can swing portfolio value before a fund manager even finishes reading the bill summary. When the One Big Beautiful Bill passed, the S&P 500 dropped by roughly 20 percent overnight, driven by investor concerns about the future of renewable energy and electric-vehicle incentives.
The market recovered in the following weeks, but the companies that came out ahead were not the ones that waited to see what happened. They were the ones that had already repositioned. Several renewable energy businesses pivoted toward energy resiliency and battery storage, a sector where demand has grown 70 percent year over year for three consecutive years, according to the U.S. Energy Information Administration.
That is the defining feature of policy risk in this market. It rarely gives advance notice, and it rewards the portfolio companies that treat regulatory and legislative monitoring as a continuous discipline rather than a one-time diligence item.
Federal regulation is not a background cost of doing business. It is one of the largest line items most portfolio companies never fully quantify. According to the Competitive Enterprise Institute, total costs of complying with federal regulations surpass $2.15 trillion per year, with some industry estimates suggesting the costs may be higher than $3 trillion due to the economic effects.
When a portfolio company is waiting on a permit for new manufacturing space, it may lose money every single day the project sits idle. OSHA requirements, environmental reviews, and zoning approvals can stack delays on top of one another.
For private equity firms, this highlights the importance of political connections and proactive government relations. Organizations cannot simply wait for necessary approvals to move forward with business expansion projects; they need to actively engage with government stakeholders throughout the process.
Two forces are reshaping how portfolio companies source materials and price contracts.
According to the Build America Buy America Act, every federally funded infrastructure project must use domestically manufactured steel, iron, and other materials, while the broader Buy American Act aims to require 65 percent domestic components for most federal procurement contracts. Companies in the portfolio that sell into government supply chains risk being disqualified from contracts they expected to win if they haven’t verified their sourcing in accordance with these requirements.
Tariffs have two-sided effects for portfolio companies. Many domestic manufacturers were pleased to see their profits increase by 7% last year as production moved back to the U.S. But tariff policy itself has proven volatile.
Companies that predicted tariff growth in 2025 were caught off guard when the Supreme Court ruled a critical portion of IEEPA tariffs unconstitutional, and ordered over $166 billion in refunds. A portfolio company that built cost assumptions based on tariffs that were later struck down, or one that failed to track whether it qualified for a refund, left real money on the table in either direction.
One of the clearest examples of policy diligence protecting portfolio value involves a private equity firm evaluating a low-cost manufacturing acquisition in Canada. On top of that, the deal looked straightforward. But a closer read of the shifting political landscape, tied to tariff changes, evolving trade agreements, and Made in America procurement requirements, revealed a different picture.
That analysis gave the firm the leverage to reduce the price it ultimately paid for the acquisition, protecting the investment from what could have become a “buy high and sell low” outcome once the regulatory picture changed.
This is the difference between reactive and proactive policy diligence. Waiting until after close to understand how tariffs or domestic sourcing rules affect a target company is a diligence gap. Building that analysis into the acquisition price itself is a competitive advantage.
Private equity groups that treat legislative and regulatory risk as a routine part of portfolio management, rather than a one-time due diligence task, have a stronger record of protecting value over the hold period.
Tariff risk, Made in America compliance, and permitting timelines should be assessed before closing rather than discovered afterward.
One government affairs department overseeing all portfolio companies creates economies of scale; one team monitoring legislative changes can identify risks and opportunities across all holdings simultaneously.
Firms that build relationships with regulators and shape how proposed rules get written are far better positioned than those reacting to a rule after it is finalized.
Government affairs fees for this kind of coverage typically run in the $20,000 to $35,000 range per month per company, a modest cost relative to the value protected when a portfolio company avoids a permitting delay, a disqualifying compliance gap, or a mispriced acquisition.
Legislation, tariffs, and permitting decisions move on their own timeline, not the fund’s. The firms that come out ahead are the ones with a government affairs partner already watching the landscape, ready to reposition a portfolio company before the risk becomes a loss, or the shift becomes someone else’s opportunity.
To see the full data behind these examples, including additional deal-level breakdowns and policy risk indicators, request the complete whitepaper from Shepherd Strategies now.
