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With financial markets anticipating a potential decline in benchmark interest rates, three private investment classes — real estate, private equity and general partner stakes — could potentially benefit from improving market and business conditions.
Timing the market is often a risky strategy, but it’s helpful for investors to understand the underpinnings of the funds and companies in their portfolios.
In December, the Federal Reserve cut its benchmark rate target range to 3.50% to 3.75%, extending an easing cycle that began in mid-2023.
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It’s a reversal from five years ago, during the COVID-19 pandemic, when the Fed increased rates from near-zero levels to a peak target range of 5.25% to 5.50%.
For investors considering allocations to these private asset classes, they should first get under the hood and see all the different ways interest rate changes impact real estate, private equity and other partnerships, as well as their holdings.
Keep in mind, there is potential downside in these investment classes, including market risk, suitability, an investor’s personal liquidity and their capacity to hold long term if markets should weaken.
Potential tailwinds for private real estate
For private real estate, declining rates could lead to increased transaction activity. Historically, when borrowing costs decrease, the housing market has seen increased interest and activity.
Lower rates might further benefit private real estate through lower borrowing costs, which could potentially fuel higher property values.
Meanwhile, property owners can refinance at more favorable rates, alleviating earlier financial pressures and improving overall operational stability.
Declining discount and capitalization rates could be positive signals for property valuations. The markets took notice when the Blackstone Real Estate Investment Trust (BREIT) recently reported that its leverage ratio — debt divided by total value — had climbed to 49%.
BREIT is one of the largest private real estate investment trusts accessible to individual investors.
Even moderate declines in rates could make an impact on valuations. Capitalization rates, tracked by analysts to forecast expected returns, are calculated by dividing net operating income by market value.
To illustrate, if a 6.5% cap rate for a trust narrows to 5.9%, the implied price appreciation would exceed about 10%.
Mortgage rates and home sales may also be pointing to a recovery. Fannie Mae projects the 30‑year mortgage rate will decline to 5.9% by the end of 2026.
Likewise, market watchers forecast annual home sales rising by 9.32% next year to an estimated 5.16 million units.
Market conditions still pose risks and challenges
Even with falling rates, conditions across private markets remain uneven and, in some areas, materially constrained.
Aggregate commercial real estate transaction volume showed a strong rebound in the third quarter of 2025, with deal activity up 25% year-over-year.
Still, this recovery has been uneven across market segments. Hospitality and office deals, for example, still lag the broader market. Some buyers cite ongoing pricing and financing uncertainty as barriers to closing deals.
Private equity faces comparable headwinds. Global private equity fundraising declined in 2025, with total capital raised falling 11% from 2024, marking two straight years of contraction, according to S&P Global Market Intelligence.
Even as dealmaking and buyout activity show signs of stabilization, constrained fundraising and slower distributions have pressured limited partner liquidity and extended funds’ holding periods.
How rates could impact private equity stakes
As with real estate, private equity also could potentially benefit from lower rates. In the first half of 2025, there are already signs of increased private equity activity, including a significant uptick in leveraged buyouts.
According to S&P Global Market Intelligence, the total value of leverage buyouts by private equity funds in the first half of 2025 equaled 70% of 2024’s total for similar deals. This increased pace of activity, S&P says, is a sign that the average size of a private equity-backed buyout is increasing.
While private equity firms previously faced headwinds owing to rising borrowing costs, a lower rate environment could drive:
Higher valuations. Declining rates could influence the present value of future cash flows, which could potentially lift multiples.
Increased buyout activity. Private equity firms use leverage to bolster returns. Lower rates could decrease the cost of these loans, potentially enhancing returns from leveraged buyouts.
Fundraising. With a more favorable outlook, private equity firms can attract interest from institutional investors with capital to deploy.
Potential exit opportunities. As market conditions stabilize, appetite for initial public offerings and acquisitions could increase.
Improved cash flow for portfolio companies. Lower interest expenses could enhance operating cash flow and profitability for companies in private equity portfolios. This could enhance the overall health and cash flows returned to investors in those portfolios.
Capital markets research firm Renaissance Capital notes that the U.S. IPO market in the third quarter had its best quarter since 2021. That pickup in public-market debuts could fuel higher valuations and shorten liquidity timelines for private equity sponsors, increasing the odds of attractive internal rates of return on recent vintages.
Revitalizing return streams from general partner stakes
There are also signals of increased demand for raising capital and strategic partnerships. According to a global survey of 100 senior PE executives by Ion Analytics, “77% of survey participants plan to make a GP-stake divestiture in the next 24 months — double the proportion that had these plans a year ago.”
General partner stakeholders could benefit from potential improvement in four return streams in a declining rate environment:
Management fee stability. Although some rebalancing may occur, improved market conditions could sustain or enhance management fee income as assets under management stabilize.
Growth opportunities in carried interest. If underlying fund performance strengthens, carried interest may improve.
Enterprise value expansion. The overall health of private equity firms could improve, fueled by potential increases in assets under management and new business ventures.
Renewed fundraising prospects. Although fundraising conditions are sensitive to market sentiment, with a more favorable rate outlook, private equity firms can attract more interest from institutional investors and attract capital for new ventures.
Falling interest rates don’t just lower borrowing costs — they can redefine investment strategies. If you and your adviser are willing to put in the time and do the homework, take a closer look at the risks and rewards of real estate, private equity and GP stakes.
