Despite growing optimism about investment conditions, the latest Goldman Sachs Asset Management survey indicates that a majority of investors still view private equity as too expensive.
The survey, conducted in June and July 2023, interviewed over 200 limited partners - often referred to as LPs and typically institutional investors or high-net-worth individuals who invest in private equity funds - and general partners, or GPs, across various private market strategies. While 64% of participants note improved investment opportunities compared to last year, a substantial 72% believe that private equity and private real estate are overvalued.
“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 are instead increasing allocations,” said Francis Idehen, partner and US head of alternative multi-strategy solutions at Goldman Sachs Asset Management. He emphasized that these limited partners yearn for stronger connections with GPs and increased co-investing activities.
US recession concerns
One significant concern raised was the possibility of an impending economic recession. A hefty 77% of respondents anticipate a U.S. recession within the next two years, while an even gloomier 90% predict a Eurozone recession within the same timeframe. Despite these looming fears, there remains an urge among LPs to remain consistently invested in private markets. “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,” explained Idehen. “They do not want to repeat the mistakes many made in 2001 or 2008.”
The survey’s methodology involved collecting insights from 46 GP firms and 166 LP firms over June and July 2023. These participants represented a diverse range of financial sectors and hailed from various global regions, with the majority originating from the Americas.
Private equity allocation currently reveals Buyouts at 12.2%, followed by Private Credit at 10.1%, and Real Estate at 9.6%. Despite their prominence, buyouts had an almost equal division with 27% over-allocated and 26% under-allocated. Speaking on this topic, Mr. Idehen said, “LPs remain most under-allocated to strategies that offer differentiated access points to private markets, particularly secondaries, opportunistic, and infrastructure allocations. 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.”
Several shifts underway
Several shifts are underway in the private equity sphere, with increasing allocations anticipated in sectors like co-investments, secondaries, and private credit in the coming years. “Increased exposures by LPs to secondaries and co-investments, some building over a decade or more, are natural evolutions in private markets. Expanding numbers of sophisticated LPs now have the resources and expertise to access these strategies as part of their core allocations,” Michael Brandmeyer, partner and co-head of Goldman Sachs Asset Management’s external investment group (XIG), noted.
With the widespread sentiment that private equity and real estate are overpriced, limited partners are inevitably becoming more discerning. “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,” observed Brandmeyer. This circumspect approach seems to underscore a transition back to fundamental value drivers.