How a structurally higher cost of capital reshapes underwriting discipline, deal structure, and exit timing.
A structurally higher cost of capital changes the arithmetic of growth investing more than it changes the businesses themselves. Cash flows further in the future are worth less today than they were when discount rates sat near zero. That single shift compresses the value of growth that has not yet been proven, and rewards growth that is already converting into durable, near-term cash generation.
The practical effect is a tightening of underwriting discipline. Growth alone no longer justifies a premium multiple; the quality and durability of that growth matter more than its rate. Revenue expansion built on discounting, subsidized unit economics, or capital-intensive customer acquisition is priced very differently in this environment than revenue expansion built on genuine structural demand and improving margins.
Deal structure adjusts accordingly. Entry valuations must leave room for a cost of capital that is unlikely to return to prior lows anytime soon, and structures that assumed continuous multiple expansion no longer hold. We size and structure investments assuming today's rate environment persists, rather than underwriting a return to conditions that may not come back.
Exit timing follows the same logic. A higher discount rate rewards patience less forgivingly — capital held in an undercapitalized or underperforming position costs more, in real terms, than it once did. That makes disciplined entry and clear-eyed diligence more important, not less, even as it makes genuine patience — held with conviction in the right business — more valuable than ever.
In short, higher rates do not weaken the case for private investments. They weaken the case for private investments practiced without discipline.