There is an overwhelming apprehension of an imminent recession in the United States and the Eurozone, challenges in fundraising by limited and general partners, but it is shot through with an undercurrent of optimism about investment opportunities.

These are the findings of a Goldman Sachs Private Markets Survey of over 200 LPs and GPs globally, investing in private markets. Private equity firms are termed general partners while investors who commit capital are called limited partners.

There has been a distinct change in the level of optimism from the start of the year when it was more subdued while at present, the sentiment is more upbeat about investing in private markets with two-thirds of those surveyed seeing improved investment conditions and slightly over a fifth saying that they are stabilising. Secondaries, private credit, and infrastructure are seen as top growth opportunities.

More than three-fourths of those surveyed fear a recession would happen in the US in the next two years. The pessimism is more marked about the Eurozone with about 90 per cent expecting a recession in the next two years. Inflation continues to be a concern both in the US and Eurozone, with more investors expecting it to rise further.

Fundraising challenges

The biggest challenge for GPs is raising funds and this has been flagged by global PE firms in their individual commentaries. 

According to the survey, GPs are expecting longer timelines for fundraising compared to their last raises. A good portion of them are either in the process of raising funds or plan to in the next 12 months and over half expect to raise more capital than they did previously.

LPs also want deeper relationships with GPs, tending to fewer commitments and greater focus on existing relationships. While LPs are significantly decreasing deployment, only a tiny portion are putting deployments on hold.

Allocation preferences

While the overallocation theme is grabbing the headline, the 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 MultiStrategy Solutions at Goldman Sachs Asset Management. He pointed out that as they return to more normalised investment activity compared to 2022, the LPs are seeking “deeper relationships with GPs, with fewer commitments and increasing co-investing activity.”

Currently of the eight major asset classes, the largest average allocation is in buyouts, followed by private credit, real estate, and infrastructure, which are also seen as high growth opportunities over the next 2-3 years.

Inflation is a key consideration for many investors in infrastructure allocation, but the strategy is benefiting from structural tailwinds “that support a bullish long-term outlook, including the digitisation of our economies and the transition toward renewable energy sources,” said Scott Lebovitz, partner, and Co-CIO of Infrastructure Investing at Goldman Sachs.

Interestingly LPs are decreasing allocations to real estate. “With real estate assets in the process of repricing, and with a more than $2 trillion wall of maturities over the next three years likely to force more re-valuations, its unsurprising that some LPs remain cautious about their real estate allocations,” said Jim Garman, Partner, and Global Head of Real Estate Investing at Goldman Sachs.

“When the great majority of LPs in our survey believe private equity and real estate are overvalued, it is no surprise they would become more selective about their allocations,” said Michael Brandmeyer, Partner, and Co-Head of Goldman Sachs Asset Management’s External Investment Group. “They are investing with GPs that are returning to fundamental value drivers, using less leverage, and investing in assets that can drive value creation through consolidation, operating efficiency, and new sources of growth to enhance value creation for the longer-term.”

Slower exits

GPs are still looking at full exits through assets sales as the most feasible route to liquidity in the year ahead, but LPs are preferring to ensure slower exits than seek secondary market relief, the survey showed.

Instead of selling more, more LPs are engaging as secondary fund investors, but this could change if discounts narrow, and LPs trim their portfolios in the coming year.

Deal-making is still subdued, and GPs are most likely to revalue their positions based on private market transaction values and by changes in operating metrics such as revenue, and EBITDA margins.

About a third of those surveyed felt that over the next five years artificial intelligence and data science would be bi-drivers of alternative investment evolution.