Goldman Sachs: Liquidity improvement and AI trading are expected to drive the recovery of private equity, with assets under management potentially reaching $500 billion within five years.

Since interest rates started to rise in 2022, private equity has been lagging behind public equity markets. However, Goldman Sachs believes that improvements in liquidity, AI-related trading activities, and continued economic growth could drive stronger returns for private equity. Pete Leone, Co-Global Head of Capital Solutions Group at Goldman Sachs Global Banking and Markets, and Michael Brandmeyer, Global Head of External Investment Team and Chief Investment Officer at Goldman Sachs Asset Management, said that the slowdown in exits and reduced capital distribution to investors have been constraining the industry. Since 2022, the average holding period of private equity funds in their portfolio companies has increased from about 5.5 years to nearly 7 years. At the same time, the percentage of assets under management allocated for distributions has been decreasing. Brandmeyer noted, "The system is not operating smoothly, making fundraising more challenging." Prior to this, the industry experienced over a decade of rapid growth. Rising interest rates have made exits more challenging, and the valuation adjustments of private equity are slower than in the public market, causing many general partners (GPs) to be unwilling to sell companies at lower-than-expected prices. Goldman Sachs currently maintains a cautiously optimistic stance. Leone and Brandmeyer anticipate that the percentage of assets allocated for distributions will increase from the current 8%-10% to 15%-20%, and trading activities are expected to surpass the peak levels seen before 2021 within the next three years. Leone stated, "We believe there won't be a 'tsunami' of distributions, but rather more stable growth as the market continues to perform." The path to liquidity is also expanding. In addition to IPOs and mergers, private equity GPs can utilize financing based on fund value or GP cash flow, as well as secondary market transfers and structured transactions. The secondary market reached a size of around $250 billion last year, and Brandmeyer predicts it could reach $500 billion within five years. These expanding channels are opening up new doors for the long-dormant exit side. The strong rise in public markets has caused the relative excess return of private equity compared to public equities (over a three-year period) to turn negative. However, Brandmeyer pointed out that when stock gains exceed 10%, private equity typically struggles to outperform the public market; and when public markets decline, private equity often significantly outperforms.