The Valuation Standoff: How Higher Rates Are Forcing a Rethink in Private Markets
Change in interest rate environment created mismatch in valuation expectations which is partially responsible for a subdued M&A environment.
In the era of low interest rates, private equity and real estate markets were buoyed by cheap leverage, aggressive buyer competition, and what now looks like overly optimistic asset valuations. Today, that environment is gone—and what’s emerged in its place is a valuation standoff.
Here is a visual depiction of company valued at 1% versus 5% interest rate:
Jeff Aronson, founder of alternatives powerhouse Centerbridge Partners ($42B AUM), recently told Bloomberg that the market isn’t suffering from a lack of liquidity, but rather from a stubborn mismatch in valuation expectations. In a revealing interview with journalist Swetha Gopinath, Aronson articulates what many industry insiders have been whispering for months: the market has money, but the price isn’t right.
“There’s lots of liquidity if people are willing to bring down the price… There are huge amounts of undrawn capital… But it’s a question of price.”
The Bid-Ask Spread Nobody Wants to Cross
The divergence between what sellers want and what buyers are willing to pay has created a logjam in dealmaking. Sellers, particularly in private equity and commercial real estate, are anchored to pre-2022 valuations. Buyers, on the other hand, have recalibrated their models to reflect structurally higher rates, tighter credit conditions, and more expensive leverage.
“Sellers want to sell at the old price. Buyers want to pay the new price. Consequently, transaction volumes decline until that bid-offer spread begins to narrow.”
This dynamic explains the dramatic slowdown in M&A activity, IPOs, and large private transactions. It’s not a crisis of capital—there’s plenty of dry powder on the sidelines—it’s a crisis of agreement. Until one side blinks, capital deployment will remain muted.
Structured Equity: The New Middle Ground
One way firms like Centerbridge are navigating this impasse is through structured equity—a hybrid approach that blends equity upside with downside protection. These deals are often bespoke, featuring terms like preferred returns, liquidation preferences, or embedded governance rights.
“We have been able to create a series of investments in our private equity strategy, which have equity upside but debt-like features on the downside.”
These deals aren’t about taking control, but about creating optionality and protection in a market where pure equity may be overpriced and pure credit may be insufficient to generate returns.
Continuation Funds: Delay Now, Exit Later
Another tactic private equity firms are increasingly using to avoid fire-sale exits is the continuation fund. Rather than selling prized assets at a discount, firms are rolling them into new vehicles backed by fresh capital—often from existing LPs. This allows GPs to extend ownership, defer exits, and avoid marking down assets in a challenged pricing environment.
Vista Equity Partners recently raised $5.6 billion for a cloud software continuation fund, one of the largest ever of its kind. The vehicle includes assets like Apptio and Duck Creek Technologies—businesses Vista believes still have room to grow. According to Bloomberg, the fund attracted commitments from blue-chip investors including Goldman Sachs, Blackstone, and GIC, signaling growing institutional comfort with this strategy.
Continuation funds serve as a kind of “price suspension” mechanism: GPs avoid crystallizing a loss or accepting a new lower market price, and LPs get optionality and liquidity windows, albeit on longer timelines.
This trend underscores how private markets are adapting to valuation mismatches—not by meeting in the middle, but by buying more time.
Where the Capital Is Flowing Now
While traditional buyouts stall, credit strategies and structured finance are absorbing capital. Real estate credit, in particular, has emerged as a compelling space. With regional banks pulling back and commercial real estate valuations under pressure, alternative lenders have stepped in to fill the void.
“Real estate credit… is an interesting place. We continue to look for ways we can offer yield-oriented investments… through direct lending.”
Centerbridge has even partnered with Wells Fargo to provide middle-market direct lending—especially for non-sponsored companies, a segment often overlooked by traditional PE.
What This Means for Investors
The old playbook no longer applies. Asset managers are adjusting to the new regime by becoming more creative, more flexible, and more conservative in underwriting.
This also has implications for retail investors increasingly being courted by private markets. Aronson cautions that while democratization is inevitable and positive, investors need to go in with eyes wide open:
“There’s no free lunch in investing… They need to understand the opportunity; they need to understand the risks.”
Final Thoughts
The current valuation standoff won’t last forever. Eventually, sellers will come to terms with the new interest rate reality—or they’ll be forced to. Until then, expect structured solutions, credit strategies, continuation funds, and opportunistic capital to dominate headlines, while traditional buyouts wait for the market to clear.
The new world is here. The only question is: how long until everyone accepts the new price?
Maybe Trump will get his wish and JP will lower the Fed Rates to 1% and everyone will be happy?
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