Despite continued concern about a coming U.S. recession and talk about overallocation to private markets, both general partners and limited partners are feeling more optimistic about their investment opportunities than they were a year ago.
Results of a new survey by Goldman Sachs Asset Management released Sept. 25 show that 64% of the LPs and GPs polled say investment conditions have improved, and 22% feel they've stabilized.
More than three-quarters of respondents, however, are still concerned about a recession by the end of 2024. The Goldman Sachs Private Markets Survey polled more than 200 global LPs and GPs — 166 LP firms and 46 GP firms — in June and July.
In addition to concerns about an economic recession, 46% of respondents said they were concerned about geopolitical conflict, 43% reported fears of inflation and 37% cited interest rates as a concern.
Investors' concerns, however, have not dampened their interest 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 the private markets," said Francis Idehen, partner and U.S. head of alternative multistrategy solutions at Goldman Sachs Asset Management, in a news release. "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."
Of the eight major asset classes included in GSAM's survey, respondents reported their largest average allocations as buyouts (12.2%), private credit (10.1%), real estate (9.6%), infrastructure (6.4%), growth (5.1%), secondaries (5.1%), venture capital (3.9%) and opportunistic/distressed (2.6%).
The survey found that LPs were far more likely to be underallocated to private equity strategies than overallocated (with the exception of buyouts, with 27% of respondents saying they were overallocated), and respondents reported that they were especially underallocated in co-investments, opportunistic/distressed and venture capital strategies.
"Counterintuitive to the headlines about overallocation, and amidst higher perceived risks, our survey shows that not only are many LPs underallocated in most strategies, but most LPs are instead increasing allocations," Idehen said. "Yet even as they return to more normalized investment activity than that in 2022, LPs report wanting deeper relationships with GPs, with fewer commitments and increasing co-investing activity."
Over the next two to three years, LPs said they planned to decrease allocations in real estate (28%), growth (16%) and buyouts (15%), while they said they planned to increase allocations to co-investments (59%), secondaries (48%), private credit (46%), venture capital (41%) infrastructure (40%) and opportunistic/distressed (40%).
"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 revaluations, its unsurprising that some LPs remain cautious about their real estate allocations," said Jim Garman, partner and global head of real estate at GSAM, in the news release. "We expect more dislocation ahead as the market adjusts to the new economic reality."
