Key Takeaways from The Alternatives Summit 2023
December 14, 2023
This article was originally published by Goldman Sachs Asset & Wealth Management.
Unprecedented events in recent years have forced investors to fundamentally rethink how they evaluate markets and build portfolios. Ongoing uncertainty and market headwinds have compelled investors, asset owners, and companies to redouble their efforts. And while today’s environment is unquestionably challenging, it also presents opportunities to reimagine the future through new technologies and approaches.
At the 23rd annual Alternatives Summit, we welcomed 430 clients alongside leading investors and industry experts to explore ideas for adapting and growing within an ever-evolving investment landscape.
“While alternatives are not new, there is much innovation happening and the tailwinds to support growth are very strong.”– Marc Nachmann, global head of Asset & Wealth Management at Goldman Sachs
RETHINK
Many long-held assumptions about markets, geopolitics, and investing have been tested in recent years. Across strategies, the consensus is that the macro environment is more important than ever, but uncertainty remains the only constant. The outlook for rates is once again in focus this year, but the question shifted from “how high can they go?” to “how long will they stay here?”
“This is causing a moment of reflection for GPs, as they consider what value creation is going to be in the next 10 years,” says Michael Brandmeyer, global co-head & co-CIO, External Investing Group (XIG) at Goldman Sachs Asset Management.
While it seems that a soft landing has been achieved for now, tightening financial conditions and exogenous factors continue to pose challenges. Geopolitical issues are increasingly forcing investors and asset owners to consider factors far beyond traditional analyses, with a large election cycle in 2024 adding more ambiguity.
"Companies want to have much more control over their business and not be so dependent on geopolitical trends,” says Lou D’Ambrosio, global head of the Goldman Sachs Value Accelerator.
As the market backdrop undergoes fundamental changes, investors are reconsidering how they build portfolios and manage liquidity.
“We are now able to take building blocks of investment strategies, styles, and factors that we’ve researched for the last 20 years and package them in a way that delivers the profile clients tend to look for, but arguably in a more liquid, cost effective, and more transparent way,” says Osman Ali, global co-head of Quantitative Investment Strategies at Goldman Sachs Asset Management.
REDOUBLE
With heightened market volatility and a higher cost of capital, the separation between winners and losers in the market has widened. During these periods of public market dislocations and re-ratings, active managers — which struggled amidst a prolonged period of low and falling rates — have more alpha potential. “Alpha is essentially skill multiplied by dispersion, and when you’ve had more inflationary periods, you have more volatility and dispersion,” according to Jack Springate, co-head, XIG Hedge Funds at Goldman Sachs Asset Management. Private markets, however, have been more insulated. “We’ve all lived during dislocations, and this feels more like a relocation because of that starting point and the pace at which it moved,” says Greg Olafson, head of private credit at Goldman Sachs Asset Management.
With less of a valuation correction in private markets, investors are focusing on minority transactions, recapitalization, and other strategies such as platform builds that aren’t as dependent upon the availability of leverage.” – Brad Gross global co-head of private equity at Goldman Sachs
Amid major structural changes, asset owners who were prudent in the past will be best positioned to capitalize on opportunities in the present. Dealmaking has slowed considerably, and there is more attention on fortifying current holdings and driving value through fundamentals. “Existing investors are doubling down on good quality companies in their portfolio,” says Stephanie Hui, global co-head of private and growth equity at Goldman Sachs Asset Management. With tighter financial conditions, asset owners are forging deeper ties with existing lenders as well. "The power of being at scale and having incumbency provides the ability to ‘shop in your own closet,’ which is really powerful,” says Stephanie Rader, global head of private credit client solutions and product strategy at Goldman Sachs Asset Management.
Value creation has come to the forefront, but these initiatives take time, and many investors today need liquidity. “This is leading to a desire for creative solutions that avoid refinancing the existing capital structure while providing some liquidity,” says Harold Hope, head of secondaries investing at Goldman Sachs Asset management.
REIMAGINE
The pace of change has accelerated across many facets of life and is unlikely to reverse. The advent of AI holds the promise of productivity increases alongside reductions in low-value work — but it also presents challenges in preparing businesses and people for new realities. Addressing areas like IT services in particular, Michael Bruun, global co-head of private equity at Goldman Sachs Asset Management noted: “If a CEO is not thinking through how generative AI is going to impact their business, then that person is probably not the right partner for us.”
Sustainability remains top of mind for a multitude of reasons, particularly for real assets where resource requirements are often most intense.
“We know 90% of the world’s GDP has made some form of net zero commitment, while the real estate industry produces about 40% of the world’s carbon emissions. And so, it’s very clear to us that the demand for green buildings will encompass the use of electric power systems and so on,” says Jim Garman, global head of real estate at Goldman Sachs Asset Management. But it will take time for the transition to play out.
“Even though people may like it to go quickly, there are physical constraints that it will make it take longer than they would like,” says Ken Pontarelli, global head of private markets sustainable investing at Goldman Sachs Asset Management.
“We certainly see some green premium in infrastructure, both in valuations and in corporate clients willing to pay a premium, whether it’s directly accessing renewable power or averting disposing waste into a landfill,” – Scott Lebovitz, co-head of infrastructure investing at Goldman Sachs Asset Management
“We need to be students of markets, thinking about the way in which all of these new drivers are going to impact real estate needs going forward, not just in the traditional places we’ve invested historically but in new places where there is currently a land grab,” says Jeffrey Fine, global head of real estate client solutions at Goldman Sachs Asset Management. As investors look ahead, however, it’s important to not lose sight of the present—a balance is between long-term strategic oversight and executing on day-to-day operations.
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