Optimism for Alts on the Rise
Private market investors are exhibiting increased confidence over investment opportunities this year relative to last year, with sentiment expanding across alternative asset classes, despite ongoing valuation gaps and apprehensions regarding geopolitical tensions, according to a survey by Goldman Sachs.
Relative target allocations were largely unchanged from 2023, but overall growth in portfolio assets has led to an uptick in absolute valuation targets through a reverse denominator effect.
General partners are increasingly concentrating on enhancing revenue growth at portfolio companies and are seeking interim liquidity solutions, such as continuation vehicles and dividend recapitalizations, to provide liquidity for Limited Partners (LPs), according to Goldman Sachs Asset Management 2024 private markets diagnostic survey, Charting New Routes.
“Investor sentiment is broadly improving, even in challenged asset classes such as real estate,” said Jeff Fine, co-head of alternative asset capital formation at Goldman Sachs Asset Management, with 38% of LPs perceiving improved investment opportunities, in contrast to 31% observing a decline.
Investors are still optimistic about infrastructure and private equity, as they are confident that they can maintain consistent performance throughout market cycles. Despite the fact that nearly a quarter of LPs are gradually losing interest in credit, investors are still optimistic on the whole.
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).
“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,” said Dan Murphy, head of alternative portfolio solutions at Goldman Sachs Asset Management.
Additionally, approximately one-third of GPs are investigating the possibility of selling equity stakes to fund their management companies. LPs are increasingly interested in semi-liquid vehicles, which now encompass equity strategies, in addition to the traditional drawdown structure.
Inflation has moderated in numerous developed economies, resulting in interest rate cuts by central banks. Consequently, valuations have started to adjust accordingly. However, they are now placing a greater emphasis on geopolitical conflicts. Approximately 60% of the respondents who participated in the survey believed that geopolitical risks are among the top three investment risks today.
Goldman Sachs stated that private market allocations are becoming more diverse, and LPs are increasing deployment levels while focusing on fewer relationships. Investors were generally under-allocated across private markets, despite the fact that some LPs were experiencing over-allocation issues.
“Sentiment is slowly shifting from cautious to courageous,” said Murphy. “Last year’s survey showed that investors and managers were staying the course, but this year, optimism is growing across alternative asset classes.”
The survey included 235 institutions and fund managers from June 13 to August 5. The breakdown was 19% GPs and 81% LPs, with the LP types drawn from asset/wealth managers (22%), public pension or retirement systems (18%), private pensions (17%), insurance companies (19%), endowments (4%), foundations (3%), sovereign wealth funds/official institutions (4%) and family offices (3%).
