Riding the Tri-Cycle in Private Markets: Identifying Compensated Risks in a Dynamic Environment
1 See, for instance: Andrea Auerbach, Keirsten Lawton, Caryn Slotsky, “US Private Equity Looking Back, Looking Forward: Ten Years of CA Operating Metrics,” Cambridge Associates, As of November 2022.
2 See, for instance, Haque, Sharjil, “Does Private Equity Systematically Over-Lever Portfolio Companies?”, July 30, 2021; and Belyakov, Alexander, “Economics of Leveraged Buyouts: Theory and Evidence from the UK Private Equity Industry.” As of March 19, 2020.
3 Burgiss (private equity data), Refinitiv (S&P 500 data). As of September 30, 2022.
4 S&P Global Market Intelligence. As of February 8, 2022.
5 LCD. As of December 31, 2022.
6 Lambert, Marie and Scivoletto, Alexandre and Tykvova, Tereza, Agency Costs of Dry Powder in Private Equity Funds (January 31, 2022). Available at SSRN: https://ssrn.com/abstract=4028838
7 CBRE. As of December 2022.
8 Placer.ai, Building Classifications determined by REBNY with assistance from Newmark Research; Chart: Rahul Mukherjee/Axios
9 Or Skolnik, Nadim Malik, and Brenda Rainey, “Raising Sector Strategy to the Next Level.” Bain Capital. As of February 2022.
Dry powder refers to assets raised by private markets funds that has not yet been deployed. Private Equity (PE) refers to investments in the equity or debt of companies that are either not listed on public exchanges or are taken private shortly after they are acquired.
EBITDA is earnings before interest, taxes, depreciation, and amortization.
GDP is Gross Domestic Product
Multiple on Invested Capital (“MOIC”) is a performance metric that compares the value generated by an investment relative to the amount invested
Private Credit refers to non-bank lending that is not issued or traded in public markets.
Real Assets describes investments into physical structures s, including real estate and infrastructure
All investing involves risk, including loss of principal.
Private equity investments are speculative, highly illiquid, involve 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 fund capital; they are, therefore, intended for experienced and sophisticated long-term investors who can accept such risks.
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.
Investors should also consider some of the potential risks of alternative investments:
Alternative Strategies. Alternative strategies often engage in leverage and other investment practices that are speculative and involve a high degree of risk. Such practices may increase the volatility of performance and the risk of investment loss, including the entire amount that is invested.
Manager experience. Manager risk includes those that exist within a manager’s organization, investment process or supporting systems and infrastructure. There is also a potential for fund-level risks that arise from the way in which a manager constructs and manages the fund.
Leverage. Leverage increases a fund’s sensitivity to market movements. Funds that use leverage can be expected to be more “volatile” than other funds that do not use leverage. This means if the investments a fund buys decrease in market value, the value of the fund’s shares will decrease by even more.
Counterparty risk. Alternative strategies often make significant use of over- the- counter (OTC) derivatives and therefore are subject to the risk that counterparties will not perform their obligations under such contracts.
Liquidity risk. Alternatives strategies may make investments that are illiquid or that may become less liquid in response to market developments. At times, a fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all.
Valuation risk. There is risk that the values used by alternative strategies to price investments may be different from those used by other investors to price the same investments.
Infrastructure investments are susceptible to various factors that may negatively impact their businesses or operations, including regulatory compliance, rising interest costs in connection with capital construction, governmental constraints that impact publicly funded projects, the effects of general economic conditions, increased competition, commodity costs, energy policies, unfavorable tax laws or accounting policies and high leverage.
Alternative Investments - Hedge funds and other private investment funds (collectively, “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.
Investments in real estate companies, including REITs or similar structures are subject to volatility and additional risk, including loss in value due to poor management, lowered credit ratings and other factors.
Alternative investments are suitable only for sophisticated investors for whom such investments do not constitute a complete investment program and who fully understand and are willing to assume the risks involved in Alternative Investments. Alternative Investments by their nature, involve a substantial degree of risk, including the risk of total loss of an investor’s capital.
The above are not an exhaustive list of potential risks. There may be additional risks that are not currently foreseen or considered.
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. 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.
Diversification does not protect an investor from market risk and does not ensure a profit.
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.
The views expressed herein are as March 28, 2023 and subject to change in the future. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.
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, they should not be construed as investment advice.
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.
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.
Examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially.
There is no guarantee that objectives will be met.
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Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.
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.
References to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only and do not imply that the portfolio will achieve similar results. The index composition may not reflect the manner in which a portfolio is constructed. While an adviser seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark.
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Date of First Use: April 20, 2023. 309882-OTU-1770384
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