Goldman Sachs Survey Shows Optimism Growing Across Alternative Asset Classes Despite Continued Valuation Gaps

LPs Broadening Private Markets Portfolios, Increasingly with Co-Investments and Secondaries With Recession and Inflation Risks Diminished, Geopolitical Conflict Risks Are Top of Mind 

(New York, October 21, 2024) – According to the new Goldman Sachs Asset Management 2024 Private Markets Diagnostic Survey, Charting New Routes, private market investors are more optimistic about investment opportunities than they were last year. While concerns about recession risk and inflation have tempered, greater focus is being placed on geopolitical conflicts and still-elevated valuations. The survey can be found at link.

“Sentiment is slowly shifting from cautious to courageous,” said Dan Murphy, Head of Alternative Portfolio Solutions, Goldman Sachs Asset Management. “Last year’s survey showed that investors and managers were staying the course, but this year optimism is growing across alternative asset classes. Investors are building allocations into new areas of private markets, driving under-allocations for many LPs – particularly in growing areas such as private credit and infrastructure, as well as different access points including secondaries and co-investments.”

Limited Partners (LPs) continue to actively build toward private credit and infrastructure targets as private market allocations become more diverse, increasing deployment levels but focusing on fewer relationships. The balance of LPs remains under-allocated across private market strategies, with challenges around over-allocations to private equity centered with LPs in the Americas.

General Partners (GPs) are expanding their offerings. Nearly a third are leveraging or evaluating the use of an equity stake sale to capitalize management companies. With exits slowed amidst concerns about inflated valuations, particularly from LPs, the survey showed that GPs are focusing on top-line growth as the leading source of value creation to close that gap.

LPs are moving beyond the typical drawdown structure, with semi-liquid vehicles expanding to include equity strategies, and 79% of LPs are increasing or maintaining capital deployment.

“Investor sentiment is broadly improving, even in asset classes such as real estate, which faced headwinds over the last two years” said Jeff Fine, Global Co-Head of Alternatives Capital Formation at Goldman Sachs Alternatives. “LP focus on macro risks, which were top of mind last year, have eased with inflation moderating and rates coming down.  Concerns about inflated valuations, however, and associated impacts on trading volumes remain.”

Liquidity is top of mind for many investors. GPs are increasingly exploring liquidity solutions to return capital to investors as exits continue to be hindered by lingering macro uncertainty and valuation disconnects between buyers and sellers. LPs are also looking for greater control over their liquidity profiles, building allocations in semi-liquid vehicles across asset classes, as well as increasing engagement with the secondary market to explore liquidity options.

Artificial intelligence (AI) continues to be the main perceived driver of industry innovation, cited by 37%, followed by the retail market (20%). Firms also are evolving: 75% are adding new strategies to product offerings, and 35% are raising third-party equity or considering it.

Investment Outlook Continues to Improve Across Private Market Strategies

Sentiment is broadly positive across asset classes, with GPs proving more optimistic than LPs. Net sentiment is slightly positive even for real estate – the most challenged asset class – with 38% of LPs seeing better investment opportunities, compared to 31% seeing worse.

Investors continue to be confident in private equity and remain bullish on infrastructure, believing they can continue to deliver consistent performance through market cycles. Credit is beginning to fall out of favor with nearly a quarter of LPs, but investors remain positive on net.

“While some LPs are experiencing over-allocation issues, investors broadly remain under-allocated across private markets and continue to show strong appetite for new access points, including co-investments, secondaries, and semi-liquid vehicles,” said Stephanie Rader, global Co-Head of Alternatives Capital Formation at Goldman Sachs Alternatives.

Geopolitical Conflict Tops Macro Risks, Replacing Recession  

Last year economic recession risk was the top reported macro risk (48%). That has fallen this year to third (35%), exceeded by geopolitical conflict (61%) and inflated valuations (40%). LPs are relatively more focused on downside risks from inflated valuations, recession, and inflation than GPs, while GPs report higher concern with interest rates and regulation than LPs.

Allocations Steady but Varying

Relative target allocations were largely unchanged from last year, but overall growth in portfolio assets has led to an uptick in absolute valuation targets through a reverse denominator effect. LPs report being under-allocated in asset classes where allocations are likely to be newer and still growing. More than half of LPs are under-allocated to private credit, and over 40% are below their target infrastructure allocations, with more LPs allocating to both compared to last year.

On the other hand, over-allocations were largely concentrated amongst LPs in the Americas in their private equity books, where allocations are likely more mature.

Roughly half of LPs are now allocating to secondaries and co-investments, up significantly from last year. In co-investments, LPs may be constrained by more than just the opportunity set, with “investment team capacity” and “operational capacity” reported as the biggest challenges in managing their organizations.

As a result of broad-based under-allocation, 39% of LPs are increasing deployment while only 21% are reducing deployment, down from 39% last year. LPs are most focused on deploying capital into credit strategies (34%), where under-allocation is most pronounced. Private equity is next (18%), followed by real estate and infrastructure (10% each).

Expectations Increased for Capital Markets Activity – but Also Defaults  

Despite declines in transaction multiples, valuations are still widely viewed as inflated, particularly by LPs. Valuations (60%) and sourcing attractive opportunities (56%) are seen by GPs as the biggest impediments for capital deployment, while exits are being hindered by macro uncertainty (58%) and valuations (53%).

To help close the valuations gap, GPs are focused on creating value through growing revenues: 63% of GPs expect to drive value creation by increasing organic revenue through existing channels, and 52% by increasing organic revenue through new channels.

Other top reported value creation avenues include M&A (45%), improving margins through technology or efficiency (35%), and adding new products or services (27%).

“With exits slowed and some valuations perceived as being inflated, GPs are focused on top-line growth as their primary source of value creation,” Amy Jupe, Global Co-Head of the External Investing Group (XIG) Private Equity Primaries team within Goldman Sachs Asset Management.

Expected liquidity routes were largely consistent with last year, particularly when seeking a full exit. Strategic sales are still expected to be the main exit route (81% likely or somewhat likely to use), followed closely by sponsor sales (70%), but there was less optimism for the IPO market.

Demand has risen for interim liquidity solutions, with dividend recaps becoming most popular (54%), followed by continuation vehicles (52%) and preferred equity (44%).

Most GPs added capabilities and offerings in recent years, via building organically with existing personnel (46%), carveouts from other firms (24%), or full acquisition of another firm (5%).

“GPs are expanding their product offerings both in terms of strategies and structures, and are often looking for outside capital to help fund these expansion plans,” said Ali Raissi, Global Co-Head of the Petershill Group within Goldman Sachs.

Sustainability More Important Outside US

Sustainability remains a key focus for large LPs and those outside the Americas. Adoption varies by asset base, with the largest cohort of investors being most likely to consider sustainable factors and broader stakeholders (84%).

“We continue to see significant focus on sustainable investment from larger investors, and particularly in EMEA and APAC, but LPs broadly have more work to do to achieve their goals,” said John Goldstein, Global Head of Sustainability and Impact Solutions, Asset & Wealth Management at Goldman Sachs.

Conclusion

As the macro backdrop remains relatively stable but uncertain, LPs and GPs expressed growing optimism across asset classes. The process of normalization following the COVID-19 pandemic is still underway, with the long-term growth trajectory of private markets remaining strong.

“New frontiers in AI, investment vehicles, and value creation are increasingly being explored, both opportunistically and out of necessity. Going forward, we expect LPs and GPs alike to continue adapting to an evolving private markets landscape that is playing an increasingly vital role across industries and regions,” concluded Mr. Murphy.

Methodology

The Goldman Sachs Asset Management 2024 Private Markets Diagnostic Survey was conducted June 13 to August 5, 2024, among 235 institutions and fund managers. The breakdown was 19% General Partners (GPs) and 81% Limited Partners (LPs), the LP types drawn from asset/wealth managers (22%), public pension or retirement systems (18%), private pension (17%), insurance (19%), endowment (4%), foundation (3%) SWF/official institution (4%), and family office (3%). GP strategies covered were headed by private equity (73%), private credit (36%), real estate (29%), and infrastructure (33%), with many managers investing across multiple strategies.

Representative assets under management (AUM) for participating GPs was 16% over $50 billion, 13% $10 billion - $50 billion, 47% $1 billion - $10 billion, 11% $500 million - $1 billion, and 13% under $500 million. For LPs, AUM represented was 30% over $50 billion, 32% $10 billion - $50 billion, 30% $1 billion - $10 billion, 3% $500 million - $1 billion, and 5% under $500 million.

About Goldman Sachs Alternatives

Goldman Sachs (NYSE: GS) is one of the leading investors in alternatives globally, with over $500 billion in assets and more than 30 years of experience. The business invests in the full spectrum of alternatives including private equity, growth equity, private credit, real estate, infrastructure, sustainability, and hedge funds. Clients access these solutions through direct strategies, customized partnerships, and open-architecture programs.

The business is driven by a focus on partnership and shared success with its clients, seeking to deliver long-term investment performance drawing on its global network and deep expertise across industries and markets.

The alternative investments platform is part of Goldman Sachs Asset Management, which delivers investment and advisory services across public and private markets for the world’s leading institutions, financial advisors, and individuals. Goldman Sachs has approximately $3.1 trillion in assets under supervision globally as of September 30, 2024. 

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About Goldman Sachs

The Goldman Sachs Group, Inc. (NYSE: GS) is a leading global financial institution that delivers a broad range of financial services across investment banking, securities, investment management and consumer banking to a large and diversified client base that includes corporations, financial institutions, governments, and individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.