Interview, Fireside Chat
Brad Gerstner: Why high interest rates mean low company valuations
- The Federal funds rate is predicted to peak in March of next year at 4% to 4.5%, with long-term expectations to return to January 2020 levels once the current period of volatility passes.
- If interest rates return to January 2020 levels, NASDAQ multiples are projected to decline by 20% to 30%, necessitating a margin of safety for long duration and high growth assets.
- Investment underwriting utilizes a 20% discount applied to the pre-COVID 10-year average to determine exit multiples, reflecting the view that current valuations in venture and C&D remain full and overvalued.
- Valuations for most growth companies are expected to settle at normal, slightly below normal, or average levels compared to January 2020, though large software rounds with little revenue carry a high risk of capital loss as they require numerous positive events to succeed.
- The firm's investment strategy involves contracting its aperture when multiples reach all-time highs and expanding it during periods of market panic, acknowledging that the price of entry remains critical even amidst future value creation.
- Secular trends in cloud data migration and ML/AI applications are anticipated to generate more value over the next decade than the previous one, provided entry points remain disciplined.
- The outlook suggests that once current uncertainty resolves, market conditions will likely revert to a "new normal" resembling the pre-pandemic "old normal."