September 27, 2023 (Preqin News) – LPs & GPs are increasingly optimistic over private market strategies compared to a year ago, according to a Goldman Sachs Asset Management (GSAM) survey, with LPs viewing co-investments, secondaries, and private credit as top growth opportunities.
According to GSAM’s survey of more than 200 LPs and GPs, conducted in June and July this year, 64% of respondents anticipated an improvement in investment conditions compared to a year ago, while 22% believe conditions are stabilizing. The survey found that LPs are increasing allocations to alternative investments, as a greater proportion of them are currently under-allocated to alternatives when compared to those who are over-allocated.
“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” Francis Idehen, Partner and US Head of Alternative Multi-Strategy Solutions atGSAM, 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. Investors want to stay the course, aided by strong active management.”
According to the survey, an economic recession was identified as a perceived risk by 48% of respondents. Of those 48%, 77% of them expect one in the US in the next two years, with 23% anticipating one in 2023, and 53% in 2024. Moreover, 90% of respondents expect an economic recession in the Eurozone, with 42% of them forecasting its arrival in 2023, and 44% in 2024.
Geopolitical conflict (46%), inflation (43%), and interest rates (37%) were the other highest ranked perceived risks.
Meanwhile, the survey found that LPs remain the most under-allocated to strategies that “offer differentiated access points to private markets” such as co-investment, secondaries, and private debt. Co-investments topped the list, with 51% of respondents under-allocated to this area, followed by opportunistic/distressed (46%), infrastructure (44%) and venture capital (41%). Buyouts were an exception with 27% over-allocated, compared with 26% under-allocated.
It showed that 59% of LPs plan to increase allocations to co-investments in the coming two to three years. Secondaries were the second most popular category (48%) for increasing allocations, followed by private credit (46%), venture capital (41%), infrastructure (40%), and opportunistic/distressed debt (40%). Real estate was the top choice for decreasing allocations among LPs (28%), followed by growth (16%), and buyouts (15%).
“Increased exposures by LPs to secondaries and co-investments, some building over a decade or more, are natural evolutions in private markets” Michael Brandmeyer, Partner and Co-Head of GSAM’s External Investment Group (XIG). said. “Expanding numbers of sophisticated LPs now have the resources and expertise to access these strategies as part of their core allocations.”
A more difficult fundraising environment is the biggest challenge faced by GPs in the coming years, the survey found, while LPs reported a track record as the most important element when considering GPs, potentially indicating greater difficulties for new managers seeking to attract investment.
GSAM surveyed 46 GP firms and 166 LP firms for their views on market conditions and alternative investments.
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