Goldman Sachs: Investors are under-allocated to private credit
Investors are under-allocated to private credit relative to targets, Goldman Sachs believes, despite “insatiable” demand for private market investments.
During a webinar to mark the publication of Goldman Sachs Asset Management’s mid-year outlook 2024, private market executives spoke about the soaring popularity of private markets, as a response to the higher-rate environment, ongoing macroeconomic risks, and shaky equity markets.
They predicted that demand for private credit products will continue to soar as investors prioritise yield and diversification in their portfolios.
However, James Reynolds, global head of direct lending at the asset manager, said that asset allocators are still under-allocated to private credit relative to targets.
“Sentiment continues to be positive towards the space as investors look for diversification, and innovation is driving expansion of the private credit universe,” said Reynolds.
“We expect risk-adjusted returns to remain attractive for lenders who are disciplined in their underwriting.
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“Lenders with scale and deep sourcing who can lend through the capital stack should be best positioned. Investors should look for companies with market leading positions in stable, defensive sectors that generate cashflow, regardless of the market cycle.”
Jeff Fine, global co-head of alternatives capital formation within Goldman Sachs Asset Management, said that yield has a real place in portfolios in the current macroeconomic environment, which is driving demand for private credit products.
“There’s a great opportunity to earn tremendous absolute yield but also really good risk adjusted returns by playing higher up in the capital stack,” said Fine.
“And because so much of the market now is in private hands as opposed to public hands there is an insatiable demand for private capital that can be more customised, that can plug gaps and doesn’t necessarily have to follow the right rules that the more traditional bank or structured lenders need to.
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“As a result it has opened up a world of opportunity with the debt maturity wall that we are approaching in both the corporate and the property space.
“We are seeing clients gravitate meaningfully into private credit at all different parts of the capital structure from mezzanine lending to hybrid lending depending on your risk tolerance and the returns that you’re trying to achieve.”
However, investors are still hesitant with their allocations. Michael Brandmeyer, global head of the External Investing Group (XIG), said that LPs are seeking liquidity from existing holdings before making new investments.
“Many are making liquidity a condition for new investments, leading GPs to look at continuation vehicles or structured solutions to return capital to investors and buy more time to increase valuations,” said Brandmeyer.
“We continue to see strong interest in secondaries as investors seek liquidity and GPs extend hold times.”
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