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, according to the new Goldman Sachs Asset Management 2024 Private Markets Diagnostic Survey, Charting New Routes.
“Sentiment is slowly shifting from cautious to courageous,” said Dan Murphy, head of alternative portfolio solutions, Goldman Sachs Asset Management GSAM).
“Investors are building allocations into new areas of private markets, driving under-allocations for many LPs (Limited Partners) – particularly in growing areas such as private credit and infrastructure, as well as different access points including secondaries and co-investments.”
Under-allocated Asia
In Asia Pacific, optimism in alternative investing is also improving, noted Stuart Wrigley, head of the Client Solutions Group in Asia Pacific at Goldman Sachs Asset Management
While the survey indicates over-exposure to private equity largely with LPs in the Americas, 48% of respondents in Asia-Pacific think they are under-allocated to the sector. Investors here have indicated a strong willingness to add to their exposure, especially through co-investments or the secondaries market.
“With larger institutional investors, we see them diversifying towards newer strategies such as the mid-market segment in infrastructure, private investment-grade debt in private credit and co-investments and secondaries in private equity,” he said.
Asian LPs have typically focused on larger, core infrastructure assets and are now keen to do due-diligence on mid-sized ones as returns become more compressed in the latter.
These LPs have larger war chests and greater flexibility to complement their existing infrastructure exposure, towards such value-add strategies. These smaller assets are also favoured as they are easier to offload to larger sponsors and not as reliant on the IPO market.
“Interestingly, we are also seeing an uptake in mid-market infrastructure portfolios with wealth managers and high net-worth individual investors through semi-liquid structures,” said Wrigley.
The survey points to growing allocation to private credit globally, and in Asia Pacific, there is also a trend of institutional investors diversifying their private credit allocations.
“Instead of focusing only on direct lending, investors are widening their search for private investment-grade debt, asset-based financing, sustainable credit and hybrid solutions in the private credit space. They are also thinking through credit risk across their public and private books and deciding on the right levels of illiquidity,” Wrigley said.
Sustainable investment is a significant focus in Asia-Pacific with 44% of respondents relying on a combination of financial and stakeholder metrics to measure their goals. The survey shows only 15% of respondents here with no sustainable investment goals.
Global trends
Wordlwide, LPs continue to 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 centred with LPs in the Americas, according to the survey.
Meanwhile, General Partners (GPs) are expanding their offerings. Nearly a third are leveraging or evaluating the use of an equity stake sale to capitalise management companies. With exits slowed amid 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.
But “concerns about inflated valuations, however, and associated impacts on trading volumes remain,” he warned.
The survey was conducted between 13 June and 5 August 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.
Liquidity concerns
Liquidity is the prominent concern for many investors. GPs are exploring liquidity solutions to return capital to investors as exits continue to be hindered by 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.
Meanwhile, artificial intelligence 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, according to the survey.
