Navigating Uncertainty: Private Markets in a Higher-Rate Environment

The era of near-zero interest rates that defined the post-Global Financial Crisis decade has decisively ended. As central banks across the developed world maintain restrictive monetary policies to combat persistent inflation, private market investors face a fundamentally altered landscape that demands strategic adaptation.

At Aethon Capital, we believe this environment—while challenging—creates significant opportunities for disciplined investors who can adapt their approach to the new reality. Here, we examine the key implications for deal structuring, valuations, and portfolio construction.

The most immediate impact of higher rates is on leveraged buyout economics. The cost of debt financing has roughly doubled since 2021, compressing the leverage multiples that lenders are willing to extend. Where a typical middle-market LBO might have been financed at 5.5-6.0x total leverage two years ago, today's transactions are more commonly structured at 4.0-4.5x.

This shift has profound implications for returns. In the low-rate era, financial engineering—simply applying leverage to stable cash flows—could generate acceptable returns even without meaningful operational improvement. That era is over. Today, value creation must come from genuine operational improvement: revenue growth, margin expansion, working capital optimization, and strategic repositioning.

For Aethon's portfolio, this shift plays to our strengths. Our in-house operating team of 45+ professionals has always focused on driving fundamental business improvement rather than relying on leverage or multiple expansion. In the current environment, this operational DNA becomes even more critical.

Valuations across private markets have begun to adjust, though the process remains uneven. In private equity, we are seeing entry multiples compress by 1-2 turns across most sectors, with greater dispersion between high-quality and lower-quality assets. Importantly, the best businesses—those with pricing power, recurring revenues, and strong competitive moats—continue to command premium valuations.

In real estate, the repricing has been more dramatic, particularly in office and retail sectors. We see compelling opportunities in logistics, life sciences, and residential properties where structural demand drivers remain intact but valuations have corrected alongside the broader market.

Looking ahead, we expect the higher-rate environment to persist for an extended period. Our portfolio construction reflects this view: we are emphasizing businesses with strong free cash flow generation, limited capital intensity, and the ability to pass through cost increases to customers. We are also maintaining conservative leverage levels and extending debt maturities where possible to reduce refinancing risk.

The current environment will inevitably create winners and losers among private market managers. Those with genuine operational capabilities, disciplined underwriting, and patient capital will be well-positioned to generate attractive risk-adjusted returns. We believe Aethon's nearly three decades of experience across multiple market cycles provides a strong foundation for navigating the period ahead.