Menu Our services in the selected location:
  • No services available for your region.
Select Location:
Select Location
    Remember my selection
    Your browser is out of date.

    Explore how we can help you

    Contact Us

    GSAM Insights

    PRUDENT EXECUTION IN PRIVATE CREDIT IS KEY FOR 2024

    Private credit benefited from higher interest rates in 2023, thanks in part to the floating-rate nature of the asset class. This year, even with the turn in the interest rate cycle and with rates expected to move lower, “the opportunity set continues to be very attractive,” said Greg Olafson in the Pensions & Investments 2024 Investment Outlook.

     

     

    February 26, 2024 | 6 Minute Read

    Greg Olafson

    Global Head of Private Credit

    Greg Olafson

     

    Prudent Execution in Private Credit is Key for 2024

     

    Private credit benefited from higher interest rates in 2023, thanks in part to the floating-rate nature of the asset class. This year, even with the turn in the interest rate cycle and with rates expected to move lower, “the opportunity set continues to be very attractive,” said Greg Olafson, global head of private credit at Goldman Sachs. Institutional investors should still expect double-digit returns, and while returns could be slightly lower than last year, they could be attractive on a risk-adjusted basis, he said.

     

    Achieving those returns, however, “will come down to the opportunity to deploy capital and to have [access to] the right client franchise. As we look ahead, we see a lot of opportunity to lend to high-quality companies,” Olafson said, particularly for experienced private credit managers deploying capital through robust deal pipelines with private equity sponsors.

     

    Ongoing pressures

     

    Following the Federal Reserve’s recent rate increases, the higher cost of debt has put pressure on borrowers, making some workout situations — when a borrower defaults and the loan terms are renegotiated — inevitable. “As companies that borrowed in the low-rate environment run up against their maturities and their rate hedges, their cost of debt will reset higher,” Olafson said. That could create pressure on companies that are not growing enough or driving sufficient revenue to offset the higher costs, and ripple effects could then inject stress into the market.

     

    But those situations are likely to be on a case-by-case basis — private credit is not facing systemic risk from higher rates, he said. Whether it’s the PE-backed sponsors or the private credit managers, the asset class has “very sophisticated practitioners who have flexible mandates, and they can work through [challenges in] the portfolio in a constructive way, provided there is a sound business reason for extending that maturity, providing more capital or amending terms.” Private credit lenders, moreover, have more control and flexibility over key factors, such as duration, covenants and amortization payments. “That is a very important aspect of private credit. [The borrower] works with the lender.”

     

    The higher cost of debt for borrowers as well as investor uncertainty around valuation price discovery last year both contributed to lower transaction volumes, Olafson noted. But with the resilient U.S. consumer and low unemployment underpinning strength in the economy, the Goldman Sachs Asset Management private credit team expects M&A volume to be higher this year. “The cost of debt coming down a bit helps, and also the [valuation] uncertainty is attenuating a bit,” he noted. Deal activity picked up in the third quarter last year, and “in our transaction volumes in our credit business, Q4 was far and away the strongest quarter of the year,” he added. “We see that continuing in the new year.”

     

    Follow the track record

     

    While the potential for increased deal flow is good news for private credit investors, the challenge is finding a hands-on manager who has a track record of access to quality deal flow and has worked through credit situations across differentiated market cycles. That’s even more true today in a more crowded private credit industry, where credit providers from other market segments have come in with a more lax view on deal terms to gain entry, Olafson said.

     

    “You should be very focused on the prudence, expertise and long track record of who you’re working with. Look at their access to quality deal flow, because the fact is that many of these deals price the same: The terms are not that different, and terms will ebb and flow based on demand and supply,” Olafson said.

     

    Private credit will continue to win over corporate borrowers, he said. “One might argue that the private credit solution is a superior solution because you’re dealing with your direct lender, who can provide certainty and flexibility and — now — the size that’s equivalent to what the public markets could historically deliver.” But “at the end of the day, it all comes down to credit underwriting standards, and the most important determinant of that is the quality of the business you lend to,” Olafson said.

     

    Labor-intensive business

     

    “It’s a labor-intensive business,” he said. “These are directly originated, directly underwritten and directly negotiated deals that require resources and people.”

     

    A private credit manager needs to be active and engaged with its portfolio companies. It requires both resources and experience to navigate through any complex situations that could arise as companies respond to shifting market conditions. “You need to be able to think like an owner,” Olafson said. Goldman’s private credit team, he pointed out, works with the firm’s PE team and value accelerator team that helps enhance the value of its portfolio businesses.

     

    Private credit managers are offering more sophisticated terms to borrowers, with hybrid solutions being active in the second half of 2023 and likely to continue over the next two years, he said. These are for situations where “these are good companies, but their growth may be a little behind plan, which means that their debt is maturing before the owner is ready to sell. They may need to add some new capital to grow [the business] further,” Olafson explained. Potential hybrid solutions could include extending maturity, a structural financing to bring in more capital, a secondary offering or a strategic sale by the PE owner.

     

    Sectors to watch

     

    Two sectors with potential for opportunity in 2024 are health care and software, both of which have exhibited strong growth and have seen a lot of PE-backed activity over the past few years.

     

    Health care is a fundamentally sound industry, which is one reason why PE managers are drawn to providing debt financing to health-care organizations. “They have strong demographics, strong innovation, significant barriers to entry and they’re capital efficient,” Olafson said. But the health-care industry, in particular, faces tight labor conditions, which can drive wage inflation.

     

    Software, also a fundamentally sound industry with a solid and recurring customer base, could find that an economic slowdown would induce corporate customers to reduce spending, or at least not increase it. That would make it harder for these companies to refinance or raise new capital at reasonable rates. “It’s, perhaps, in disappointing growth where the risk lies,” Olafson said. In both health care and software, “there’ll be a lot of opportunities, and there may be some challenges as well,” he added.

     

    The secular, long-term transition away from fossil fuels to renewable energy sources is an area ripe for private credit investment. This transition, which is still in its early stages, will require heavy amounts of investment, both equity and debt capital. “Innovation around energy efficiency, the energy transition and decarbonization is an opportunity that will require a lot of capital, and there will be opportunities to lend and invest against that,” Olafson said.

     

    Focus on execution

     

    Regardless of how the economy performs in 2024, companies in health care, software, energy and other segments will continue to need fresh capital and refinance existing capital, providing private credit managers with deployment opportunities throughout the year.

     

    Today “it’s all about the quality of the transaction: The A-credit book is built one deal at a time,” Olafson said. In a more complex market environment that needs the steady hand of an experienced private credit manager, “we have to ensure that in this somewhat euphoric moment for private credit, we don’t lose sight of the fact that it’s a business rooted in prudence, in execution, in application, in diligence.”

     

     

    Related Insights
    ×

    Start the Conversation

    Committed to providing you with the insights you need to build your practice.

     
    Let's Talk

    Disclosures

    Alternative Investments – Alternative Investments are subject to less regulation than other types of pooled investment vehicles such as mutual funds. Alternative Investments may impose significant fees, including incentive fees that are based upon a percentage of the realized and unrealized gains and an individual’s net returns may differ significantly from actual returns. Such fees may offset all or a significant portion of such Alternative Investment’s trading profits. Alternative Investments are not required to provide periodic pricing or valuation information. Investors may have limited rights with respect to their investments, including limited voting rights and participation in the management of such Alternative Investments.

    Alternative Investments often engage in leverage and other investment practices that are extremely speculative and involve a high degree of risk. Such practices may increase the volatility of performance and the risk of investment loss, including the loss of the entire amount that is invested. There may be conflicts of interest relating to the Alternative Investment and its service providers, including Goldman Sachs and its affiliates. Similarly, interests in an Alternative Investment are highly illiquid and generally are not transferable without the consent of the sponsor, and applicable securities and tax laws will limit transfers.

     

    Conflicts of Interest

    There may be conflicts of interest relating to the Alternative Investment and its service providers, including Goldman Sachs and its affiliates. These activities and interests include potential multiple advisory, transactional and other interests in securities and instruments that may be purchased or sold by the Alternative Investment. These are considerations of which investors should be aware and additional information relating to these conflicts is set forth in the offering materials for the Alternative Investment.

    An investment in private credit is not suitable for all investors. Investors should carefully review and consider the potential investment, risks, charges, and expenses of private credit before investing.   The investment is speculative, highly illiquid, involves a high degree of risk, have high fees and expenses that could reduce returns, and subject to the possibility of partial or total loss of capital. The investment is, therefore, intended for experienced and sophisticated long-term investors who can accept such risks.

    A fund, underlying funds, and/or portfolio assets may utilize leverage which could have significant adverse consequences. In particular, a fund will lose its investment in a leveraged portfolio investment more quickly than a non-leveraged portfolio investment if the portfolio investment declines in value. Money borrowed for the purpose of leveraging investments will also be subject to interest costs as well as financing, transaction and other fees and costs that may not be recovered. You should understand fully the risks associated with the use of leverage before making an investment in a fund.

    This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs has no obligation to provide any updates or changes.

    This material represents the views of Goldman Sachs Asset Management. It is not financial research or a product of Goldman Sachs Global Investment Research (GIR). It was not a product nor financial research of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed herein may vary significantly from those expressed by GIR or any other groups at Goldman Sachs. Investors are urged to consult with their financial advisers before buying or selling any securities. The information contained herein should not be relied upon in making an investment decision or be construed as investment advice. Goldman Sachs Asset Management has no obligation to provide any updates or changes.

    THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

    Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

    This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

    Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

    Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

    Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.

    Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

    Entities Providing Services. This presentation is intended only to facilitate your discussions with the applicable Goldman Sachs entity including, but not limited to, Goldman Sachs & Co. LLC, Goldman Sachs International, Goldman Sachs AG, Goldman Sachs Paris Inc. Et Cie., Goldman Sachs Saudi Arabia, Goldman Sachs Bank AG, Goldman Sachs (Asia) L.L.C, Goldman Sachs (Singapore) Pte (Company Number: 19862165W), Goldman Sachs Futures Pte. Ltd (Company Number: 199004153Z); Goldman Sachs Australia Pty Limited. In connection with its distribution in the United Kingdom, this material has been issued and approved by Goldman Sachs International which is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. This material has been approved for issue in the United Kingdom solely for the purposes of Section 21 of the Financial Services and Markets Act 2000 by GSI, Plumtree Court, 25 Shoe Lane, London EC4A 4AU; by Goldman Sachs Canada, in connection with its distribution in Canada; in the United States by Goldman Sachs & Co. LLC; in Hong Street (Beijing) Equity Investment Management Co., Ltd., in Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in Japan by Goldman Sachs Japan Co., Ltd; in Australia by Goldman Sachs Australia Pty Ltd (ACN 006 797 897); and in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 19862165W).

    This material represents the views of Goldman Sachs Asset Management. It is not financial research or a product of Goldman Sachs Global Investment Research (GIR). It was not a product nor financial research of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed herein may vary significantly from those expressed by GIR or any other groups at Goldman Sachs. Investors are urged to consult with their financial advisers before buying or selling any securities. The information contained herein should not be relied upon in making an investment decision or be construed as investment advice. Goldman Sachs Asset Management has no obligation to provide any updates or changes.

    Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. Nothing in this document should be construed to constitute allocation advice or recommendations.

    United Kingdom and European Economic Area (EEA): In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. Switzerland: For Qualified Investor use only— Not for distribution to general public. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law.

    Asia excluding Japan: Please note that neither Goldman Sachs Asset Management (Hong Kong) Limited (“GSAMHK”) or Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H ) (“GSAMS”) nor any other entities involved in the Goldman Sachs Asset Management business that provide this material and information maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore, India and China. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited and in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number:

    Australia: This material is distributed in Australia and New Zealand by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (’GSAMA’) and is intended for viewing only by wholesale clients in Australia for the purposes of section 761G of the Corporations Act 2001 (Cth) and to clients who either fall within any or all of the categories of investors set out in section 3(2) or sub-section 5(2CC) of the Securities Act 1978, fall within the definition of a wholesale client for the purposes of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) and the Financial Advisers Act 2008 (FAA),and fall within the definition of a wholesale investor under one of clause 37, clause 38, clause 39 or clause 40 of Schedule 1 of the Financial Markets Conduct Act 2013 (FMCA) of New Zealand (collectively, a “NZ Wholesale Investor”). GSAMA is not a registered financial service provider under the FSPA. GSAMA does not have a place of business in New Zealand. In New Zealand, this document, and any access to it, is intended only for a person who has first satisfied GSAMA that the person is a NZ Wholesale Investor. This document is intended for viewing only by the intended recipient. This document may not be reproduced or distributed to any person in whole or in part without the prior written consent of GSAMA.

    To the extent that this document contains any statement which may be considered to be financial product advice in Australia under the Corporations Act 2001 (Cth), that advice is intended to be given to the intended recipient of this document only, being a wholesale client for the purposes of the Corporations Act 2001 (Cth).

    Any advice provided in this document is provided by either of the following entities. They are exempt from the requirement to hold an Australian financial services licence under the Corporations Act of Australia and therefore do not hold any Australian Financial Services Licences, and are regulated under their respective laws applicable to their jurisdictions, which differ from Australian laws. Any financial services given to any person by these entities by distributing this document in Australia are provided to such persons pursuant to the respective ASIC Class Orders and ASIC Instrument mentioned below.

    * Goldman Sachs Asset Management, LP (GSAMLP), Goldman Sachs & Co. LLC (GSCo), pursuant ASIC Class Order 03/1100; regulated by the US Securities and Exchange Commission under US laws.

    * Goldman Sachs Asset Management International (GSAMI), Goldman Sachs International (GSI), pursuant to ASIC Class Order 03/1099; regulated by the Financial Conduct Authority; GSI is also authorized by the Prudential Regulation Authority, and both entities are under UK laws.

    * Goldman Sachs Asset Management (Singapore) Pte. Ltd. (GSAMS), pursuant to ASIC Class Order 03/1102; regulated by the Monetary Authority of Singapore under Singaporean laws

    * Goldman Sachs Asset Management (Hong Kong) Limited (GSAMHK), pursuant to ASIC Class Order 03/1103 and Goldman Sachs (Asia) LLC (GSALLC), pursuant to ASIC Instrument 04/0250; regulated by the Securities and Futures Commission of Hong Kong under Hong Kong laws

    No offer to acquire any interest in a fund or a financial product is being made to you in this document. If the interests or financial products do become available in the future, the offer may be arranged by GSAMA in accordance with section 911A(2)(b) of the Corporations Act. GSAMA holds Australian Financial Services Licence No. 228948. Any offer will only be made in circumstances where disclosure is not required under Part 6D.2 of the Corporations Act or a product disclosure statement is not required to be given under Part 7.9 of the Corporations Act (as relevant).

    FOR DISTRIBUTION ONLY TO FINANCIAL INSTITUTIONS, FINANCIAL SERVICES LICENSEES AND THEIR ADVISERS. NOT FOR VIEWING BY RETAIL CLIENTS OR MEMBERS OF THE GENERAL

    Canada: This presentation has been communicated in Canada by Goldman Sachs Asset Management LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. Goldman Sachs Asset Management LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.

    France: FOR PROFESSIONAL USE ONLY (WITHIN THE MEANING OF THE MIFID DIRECTIVE)- NOT FOR PUBLIC DISTRIBUTION. THIS DOCUMENT IS PROVIDED FOR SPECIFIC INFORMATION PURPOSES ONLY IN ORDER TO ENABLE THE RECIPIENT TO ASSESS THE FINANCIAL CHARACTERISTICS OF THE CONCERNED FINANCIAL INSTRUMENT(S) AS PROVIDED FOR IN ARTICLE L. 533-13-1, I, 2° OF THE FRENCH MONETARY AND FINANCIAL CODE AND DOES NOT CONSTITUTE AND MAY NOT BE USED AS MARKETING MATERIAL FOR INVESTORS OR POTENTIAL INVESTORS IN FRANCE.

    Confidentiality

    No part of this material may, without Goldman Sachs Asset Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

    As of February 1, 2024

    359197-OTU-1980895

    © 2025 Goldman Sachs. All rights reserved.