Investors optimistic about investment opportunities in private markets

In a survey conducted by Goldman Sachs in June and July 2023, gathering insights from over 200 limited partners (LPs) and general partners (GPs) across various private market strategies, a growing optimism regarding investment opportunities emerged, compared to the previous year.  

64% of survey respondents perceived improved investment conditions, with an additional 22% observing stabilization. Despite widespread concerns about overallocation, a significant portion of LPs revealed they were under-allocated to alternative investments. 

“Counter intuitive to the headlines about ‘overallocation,’ and amidst higher perceived risks, our survey shows that not only are many LPs under-allocated in most strategies, but most LPs are instead increasing allocations,” said Francis Idehen, partner and US head of alternative multi-strategy solutions at Goldman Sachs.  

The perceived risks highlighted by respondents centered on macroeconomic concerns rather than market-specific factors, with the most prevalent concerns being economic recession (48%), geopolitical conflict (46%), inflation (43%), and interest rates (37%). 

“Even with higher inflation and recessionary fears, the LPs we surveyed are predominantly experienced investors who recognize the importance of remaining consistently invested in private markets,” Idehen said.  

“They do not want to repeat the mistakes many made in 2001 or 2008 by pulling back from alternatives, then struggling to plug the vintage-year holes in their portfolios,” he added. “Investors want to stay the course, aided by strong active management.” 

Asset allocations 

LPs indicated a higher likelihood of being under-allocated to private equity strategies than over-allocated.  

“LPs remain most under-allocated to strategies that offer differentiated access points to private markets, particularly secondaries, opportunistic, and infrastructure allocations,” Idehen said. “They have the highest interest in co-investments opportunities, reflecting the rising desires of LPs across the industry to establish deeper relationships with fewer favored GPs.”  

While 58% of LPs had no current allocation to co-investments, 59% planned to augment their allocations over the next two to three years. Secondaries emerged as the second choice for increasing allocations (48%), followed by private credit (46%), venture capital (41%), infrastructure (40%), and opportunistic/distressed (40%). 

“Increased exposures by LPs to secondaries and co-investments, some building over a decade or more, are natural evolutions in private markets,” said Michael Brandmeyer, partner and co-head of Goldman Sachs’s External Investment Group (XIG). “Expanding numbers of sophisticated LPs now have the resources and expertise to access these strategies as part of their core allocations.” 

“While inflation is a key consideration for many investors' infrastructure allocations, the strategy is benefitting from structural tailwinds that support a bullish long-term outlook, including the digitization of our economies and the transition toward renewable energy sources,” said Scott Lebovitz, partner and co-chief investment officer of infrastructure investing at Goldman Sachs. 

The survey also examined LPs' perceptions of equity markets, both public and private, across corporate and real estate domains. Over 72% of LPs regarded private equity and private real estate as generally expensive.  

Additionally, 54% believed this was the case for public equity, while 41% held this view regarding public real estate. Conversely, public fixed income (72%) and private credit (59%) were widely perceived as fairly valued by LPs. 

“LP’s belief that fixed income and credit offer good value is driving interest in private credit. As traditional debt markets retract and capital costs rise, borrowers of all types increasingly seek out innovative and bespoke financing solutions,” said James Reynolds, partner and global co-head of private credit investing at Goldman Sachs. 

Future trends and sustainable investment goals 

Looking ahead over the next five years, 33% of survey participants anticipate that artificial intelligence (AI) and data science will be the primary drivers of evolution in alternative investments. This is followed by an emphasis on expanding access to retail audiences (20%) and anticipating changes in the business cycle (16%). 

While sustainability is a large focus for 75% of investors, the survey revealed that only 43% of GPs have made substantial progress toward their sustainable investment goals. In contrast, just 18% of LPs reported the same progress.  

While GPs are generally viewed favorably in terms of their sustainability capabilities, LPs appear less confident in their ability to assess these capabilities. 28% of LPs indicated that they do not have sustainable investment goals, with the majority located in the United States. In line with this trend, GPs are shifting their investment preferences towards renewable energy, with 21% highlighting increased focus compared to the previous year. 

Fundraising challenges 

In light of the commitment slowdown, 66% of GPs list fundraising among their top three non-investment challenges. Notably, 68% of GPs are actively fundraising or have plans to do so within the next 12 months. Although GPs anticipate longer fundraising timelines compared to their previous efforts (36% versus only 6% expecting shorter timelines), 56% are optimistic about raising more capital this time. 

“Private markets have grown at an extraordinary pace, rewarding many GPs and LPs,” Brandmeyer said. 

“Volatility and uncertainty may impact fundraising and growth, but most LPs report staying the course on private allocations and seeking to increase exposures across an array of strategies. Enhanced visibility into interest rate and macro trends could lead to greater confidence in valuations and improve liquidity.”