Brad Gerstner: Why high interest rates mean low company valuations

Valuation Discipline and Margin of Safety

• Investors must apply a 20% discount to the pre-COVID 10-year average exit multiples to ensure target returns.
• This conservative approach is necessary for late-stage rounds ($1–$3B) with little revenue, where valuations often rely on "absurd multiples" and a "greater fool" theory.
• The firm refuses to carry positions for other investors, conducting independent due diligence rather than following market momentum.
• Original investments require a built-in margin of safety to account for potential errors when interest rates rise.

Impact of Interest Rates and Rate-of-Change on Investment Strategy

• The rate of change in interest rates is the primary driver of valuation compression, particularly for long-duration, high-growth assets.
• A shift from 50 basis points to 400 basis points on the 10-year Treasury created market paralysis by making future multiple predictions difficult.
• A higher risk-free rate drastically increases the capital hurdle rate; theoretically, a 20% risk-free return would reduce venture investment volume by 90%.
• The firm uses the future strip of market expectations rather than macro forecasting, currently modeling a Fed funds rate peak of 4% to 4.5% in March of next year.
• The speaker previously predicted a 20%–30% decline in NASDAQ multiples once COVID normalized, noting that current volatility reflects a global pandemic rather than permanent structural damage.

Strategic Response to Market Volatility

• Investment aperture (capital deployment) expands when the market is panicked ("blood in the streets") and contracts when multiples are at all-time highs.
• The strategy avoids an "all or none" approach, instead adjusting volume based on valuation clarity and market stability.
• Current public market declines (40%–70% in growth names) are viewed as a correction to pre-2020 valuations rather than a "blood in the streets" opportunity.
• The speaker advises against anchoring to 2020 valuations and advocates for "de novo underwriting" based on current facts.

Forward-Looking Statements and Sector Outlook

• While the firm signs deals like recent Series A and Series B term sheets, it maintains that current venture and C&D valuations remain fully valued.
• The firm expects significantly more value creation over the next 10 years compared to the previous decade, driven by secular trends in cloud migration and ML/AI applications.
• A key forward-looking constraint is the necessity for a "predictable cost of capital" before underwriting can proceed at scale.
• The speaker anticipates a return to an "old normal" once the period of massive uncertainty and volatility concludes.