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August 18, 2022  |  6 Minute Read


What's Inside

The S&P 500 officially entered bear market territory in June, buffeted by inflation, rising interest rates and slower growth. With Treasury yields climbing to three-year highs, equities and other risk assets suffered a steady decline and weaker returns, contributing to a decrease in aggregate funded status at US public pension plans.



Quarterly Snapshot


Historical Aggregate Funded Status1


Source: Boston College Center for Retirement Research, Goldman Sachs Asset Management. As of June 30, 2022. For illustrative purposes only. All aggregate funded statuses based on estimated asset returns and liability growth.


Year-over-Year Funding Levels1


Source: Boston College Center for Retirement Research, Goldman Sachs Asset Management. As of June 30, 2022. For illustrative purposes only. Figures based on estimated asset returns and liability estimates for reference population. Figures may not sum to 100% due to rounding.


Source: Goldman Sachs Asset Management and Bloomberg. As of June 30, 2022. For illustrative purposes only.


Risk assets continued to see negative performance in the second quarter of 2022 as elevated inflation expectations, a hawkish Fed, and worries about an economic slowdown weighed on investor sentiment. US Treasury yields rose 67 basis points (bps) during the quarter as the Fed continued to grapple with an overheating economy. The challenged economic and market landscape led to weaker returns across the board, resulting in a decrease in aggregate funded status for U.S. public pension plans from an estimated 82% on March 31st to 71% on June 30th.



Market Perspectives


Investors are finding that outperformance of their private markets portfolios, followed by declining liquid asset classes in 2022, have led to over-allocation relative to private equity targets. Many are considering whether and how to rebalance their portfolios, and the secondary market is an area of interest. Suzanne Gauron outlines a few considerations on secondary market selling.


Suzanne Gauron

Head of Private Equity Strategies, Alternatives Capital Markets & Strategy

Suzanne Gauron


In light of recent public market volatility, what can we eventually expect to see in private markets in terms of valuations?

Private equity valuations are subject to two concepts: lagging and smoothing. This means that, in general, valuation changes in private markets take more time to reach investors, not just because they are valued quarterly, and those values are sent to investors often months after quarter-end, but also because they tend to experience more moderate changes in valuation— both the increases and the decreases.


We haven’t yet observed significant decreases in valuations in private equity as of Q1 2022, with buyouts roughly flat for the quarter, but would expect that valuations will start to adjust with Q2 marks, reflecting operating performance and the current exit environment.


One area that we are watching is the significant unfunded capital in private equity (“dry powder”) which may allow private equity managers to continue to invest at valuations above those we are observing in the public markets.



What are the considerations that cause pensions to sell?

Selling in the secondary market is almost always strategic in nature. The market has significant frictions in terms of time and costs. As a result, sellers rarely sell because of differences of opinion on value.


Pensions and other investors mainly sell in the secondary market because of changes to their portfolio. Some of the recurring reasons we observe include over-allocation to the asset class (common in 2022), reducing number of manager relationships, reweighting or exiting strategies, “cleaning up” old tail end investments, and changes at the organization, such as a new asset allocation or CIO.


Sellers typically receive a discount to the unrealized net asset value (“NAV”) when they sell, so the analysis requires that there is a non-financial value to making these changes to the portfolio.


As more investors are long term participants in private markets these themes lead them to sell more than once in the secondary market.



How liquid is the secondary market and what assets are salable?

The answer is: it depends. The secondary market has grown exponentially. In 2021 approximately $130bn transacted in the secondary market, which was a historic high. But this is a small fraction of the $8–$9tn estimated private equity assets today. In times of market dislocation, when values are less agreed by buyers and sellers, the secondary market tends to slow down significantly. We are starting to observe this in H1 2022 because buyers were bidding at discounts that sellers were generally unwilling to accept. Some of this is due to the NAV lag—the valuations LPs are looking at are three to six months old, and therefore from a very different place in the market. Over a few quarters this will adjust, in part because NAVs will reflect current value and then discounts may be narrower.


In addition, two considerations to consider are quality and strategy. Perceived higher quality GPs are more saleable in the market, assuming the GP is supportive of a secondary sale, an essential consideration since GPs have approval rights on sales. Strategy is also an important consideration; the majority of secondary buyers focus on buyout assets. Other private markets asset classes including venture, energy, infrastructure, credit, and real estate have a narrower buyer base and may receive fewer bids.



So you want to sell. Now what?

The secondary market is no longer just a “buy or hold” decision. Sellers have many options to consider, including financing, partial sales, deferred payments and more structured solutions. It is important to define your objectives upfront. What factors are you optimizing for—price, size, “day one” cash, liability reduction, number of interests sold? Those are just a few. Defining your objectives will allow you, and any advisors you engage, to construct the best portfolio for sale and the best sale process for you. Also remember that secondary sales take time. It can help to solve backwards from when you may need to have completed a sale. It’s also important to remember that your GPs have a say in most sales, so understanding their approach and guidelines early is critical to a successful outcome.



Summary of Tactical Asset Class Views


Source: Investment Strategy Group. Asset class views as of July 11, 2022. Please see appendix for additional details on the above viewpoints. Views 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. The economic and market forecasts presented herein have been generated by Goldman Sachs Asset Management for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Any mention of an investment decision is intended only to illustrate our investment approach and/or strategy, and is not indicative of the performance of our strategy as a whole. It should not be assumed that any investment decisions shown will prove to be profitable, or that any investment decisions made in the future will be profitable or will equal the performance of the investments discussed herein. Please see appendix for additional disclosures.



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Public Pension Quarterly 2Q 2022: Turbulence Continues

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1 Based off an estimate of a sample of 99 public pension plans’ market value returns and plan liabilities, with asset allocation data sourced from Boston College Center for Retirement Research; plan assets for these plans are approximately $3 trillion.

2 S&P 500 and Bloomberg Agg figures represent total returns. Real estate performance represented by Dow Jones Global Select Real Estate Index. Hedge fund performance represented by Proshares Hedge Replication ETF



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