As interest rates stay elevated, private equity firms must relearn how to create value, with Luxembourg once again in the engine room of global strategy.
For years, private equity had it easy. Not because GPs didn’t work hard, they definitely did, but because the macro backdrop was so forgiving. Borrowing was cheap, liquidity was endless, and exits came quickly. You could lever up a deal, wait a few years, and sell at a higher multiple. The playbook worked.
That playbook is no longer working.
We are now living in what central bankers cautiously call a higher-for-longer interest rate environment. But let’s be honest: this is not just a policy phase. It is a structural shift. Inflation is stickier, risk premia are back, and cheap leverage has exited the stage.
Private equity, long fueled by financial engineering, is being pushed into a different kind of game. One that rewards craft over capital.
Talk to a mid-market GP and you’ll hear a different tone these days. Deals are taking longer to close. Sellers still want yesterday’s prices. Banks have tightened. Private credit is still flowing, but at higher cost and with tighter covenants. That 10 percent IRR no longer looks like a base case. It looks like something you fight for.
From momentum to mechanics
What this means is simple: private equity firms will need to create value the old-fashioned way. Improve margins. Build real teams. Hold longer. Accept lower leverage and, in many cases, longer timelines. For some GPs, that’s a problem. For others, it’s a return to what the industry was supposed to be about.
Exits are slower too. IPO windows are barely open. Strategics are cautious. Secondaries are evolving into their own asset class. In Luxembourg, where many continuation vehicles are now structured, service providers are fielding increasingly complex mandates. Often with layered carry, rolled equity, and blended terms.
It is no longer just about enabling tax efficiency. It is about enabling flexibility.
The fundraising reality check
LPs are no longer lining up. They are asking harder questions. They want visibility on exits, not just deployment. They want fees to make sense again. The denominator effect may be fading, but the discipline it imposed is not.
Here in Luxembourg, the conversations have shifted. Structuring remains vital, but it is no longer the only advantage. Managers need clarity, transparency, and tools to manage complexity, especially across multiple jurisdictions and investor types.
So what works now?
Funds that stay small. Teams that specialize. Strategies that do not depend on easy money. Secondaries with real price discipline. Platforms that can accommodate creative structuring without compromising control.
In short, a shift from scale to substance.
Back to the craft
Private equity is not in crisis. It is just maturing. The firms that thrived in zero-rate environments may struggle. But those that know how to build, operate, and adapt will come through stronger.
And once again, Luxembourg will be at the heart of it. Not just as a legal domicile, but as a launchpad for a more disciplined and thoughtful era of private markets.
Christophe Santer is a columnist for Investment Officer Luxembourg. A Luxembourg native, Santer has nearly two decades of experience in fund administration, investor services, and private markets. He also works as director of business development manager at bunch.