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What’s Driving Growth in Alternative Asset Classes?

2020-06-30

Kristin Olson, global head of the Alternative Capital Markets Group in Goldman Sachs' Consumer and Investment Management Division, explains where investors are finding value in alternative asset classes.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is it in the Goldman Sachs. What we discussed developments, curly, shaping markets, industries in the global economy, objects, seaward, global head of corporate communication shared the fur today by Christian Olsen global head of the alternative capital markets group within the consumer and investment management vision, a common, we'll talk to Christian, about the alternative space and what's been driving interest from investors both recently was covered in over the longer term. Welcome christened the problem, a state based me before, which have been introduced yourself. Kristen give a quick summary of your role and your tenure here, the fur shore
sell Jake. I'm a Goldman Sachs Lifer. I've been here for another twenty two years this July I started at the firm after Undergrad Georgetown. I started my prayers and analysed in investment, banking, the financial institutions route and I moved over to the investment management division and now the consumer and investment management division in two thousand and one to work at all. Of capital markets, and that's the group that I led today. So I've spent really almost all of my career and alternatives. Alternate capital markets within the private wealth management vision, a comment and my team responds over the turkey, the alternate besants platform in terms of investment for Chinese that we show to our global pride of self management clients so include israeli sourcing structuring ultimately marketing these opportunities to our clients. So my team really curates the cat under an opportunity that we leave with both the internal investing areas, Goldman Sachs that focus on alternatives as well spending a lot of time looking for best in class external managers, knelt space,
course will get two decades plus of your wisdom. Here, let's start with just definition only the word alternatives gets thrown around a lot, but let's define exactly what we mean when we say alternatives. So I guess level. I would describe alternative investment almost by what they are. Not so really alternate. Investments is a catch all for it. Anything that's not pass, or traditional asset classes like public equities or public fixed income, so really a broad front, clear the number of sub asset classes and strategies, so I'd really get down into four main sub asset classes, so private equity, fry, the real estate, private credit and hedge funds but really even within these categories. You ve got a number of strategies, so, for example, if you take private equity back inside the whole spectrum of opportunities that range from an avenger carpet. on one end of the spectrum which is looking at,
asked in really early stage companies or even concepts. If you think of angel unresting you're through growth equity, which is looking for in these companies through their growth stage to the more british, no, you know elbow space. There were familiar, whether your investing in large established private companies or potentially public companies that you're looking to take private and then even the other, an inspection which is distressed, investing so really bad, you know fits under the private equity banner and then turned up. The real estate and we could be talking about yield, oriented core strategies at one end of the spectrum, value, Friday's that would be a mix of yielding capital appreciation. Org together the spectrum, opportunistic, investing looking at night, performing loan portfolios or even real state development aid really with a different risks. I'm profile so you'll see you know even a similar range of such strategies under hedge funds and private credit as well. You know I also note that alternative tend to be characterized by a limited liquidity, right and liquidity, and I think that's another one
she defining points of alternatives, whereas tradition classic classes are typically viewed as a daily liquidity instruments. So you know the second is that adding alternative investment portfolios should improve the overall risk return profile you, if you can size that allocation appropriately, So obviously the outer space grown dramatically in the last twenty years, what's been driving the growth in the alternative, ass, a class so much rose, has been driven by the large institutional implications that have come from sovereign wealth funds. Pension funds, as was endowments, see a lot of those who look to them those like the Yale Endowment Door in a c p, p B, the Canadian. Action plan and best on board examples of large investors that have allocated almost half their assets to alternatives and while the others, really outliers at fifty percent, we have seen increases across the board to alternatives, from pension funds that others, if you look at the average
hundreds and allocations I'll turn is it's gone from about eleven percent sex to you know over twenty six percent- or so you know a decade or so later, and this growth There has also been matched by the interest we have seen on the private client side when so just to get some of our own perspective, a goal. Man, if I look at what we ve seen an alternative capital markets last or two thousand nineteen was frankly a record, your frost in terms of capital commitments, alternatives turned its clients and I think, there's a number of reasons for this in a wine having an evolution in terms of the size and the sophistication of our clients, so our portfolios have grown by private clients but, more importantly, the sophistication levels of our clients has also increased. in the rise of family offices and you ve just seen investors more and more and best for the long term and protector well side, you think of
passing for multiple generations with a long term investment horizon which is went to self. Well. Just thinking about you know all turned it in many cases have had a five to ten year types of duration across the private equity empire real. So you know we ve spent a lot of time over the past decade, really educating clients about the role of alternatives and a portfolio and how, build a thoughtful allocation, and I think the punchline as it takes time, writing For many years to build up to a target- his allocation in a portfolio and it tastes consistency near taking year in and year out, in order to get your target. If. Look at you know our investment strategy groups recommendation for a modern rescue s taxable client. We would advocated for almost it eighty five percent allocation to alternatives in the portfolio
so that's grown overtime monopoly, that's quite significant allocation and the lion's share of this thought. Fourteen, a half percent of it would be to private equity, with the ballad spread across private credit infrastructure. A core real estate and had thoughts. So I think it a part of it. Growth has been just sort of ass. We ve done properly construction with advocated for a big allocation, but then it just think about science, anything, but the fact that they ve been increasingly turning to private equity as turn away from, what's been a challenging public market to put new money into. So I think if we What about in a pre covered? Nineteen clients were feeling that we are very much in a late cycle and were cautious, write about further to equity. As you know, with peace that no twenty one times multiples of yet twenty nineteen and remained
elevated frankly today, and so I think wild private equity evaluations are also elevated. Investors have seen the alpha. Private equity has been able to generate over public equities over long periods of time to the extent. They can build a thoughtfully diverse, I private equity portfolio. So I think that impelling long term performance is another one of the reasons that we ve seen a big shift to alternatives into private equity. In particular, and to give some contacts, I would say you know investors to be compensated for that liquidity or looking for several hundred basis. Points of outperformance over the public equity market equivalent So I think you know having look now at several decades. A performance as Univee but equity. History is now really reached cut maturation point. having investors are convinced of the ability of these managers to generate alpha over their options, the public equity markets- and so that's been another big driver of that shift. So you
reference, the growth of sub asset classes within alternative. Wasn't that Longo say twenty years ago, so that people are put money into a buy out fund, but today you, as you mentioned, that private credit, private infrastructure alternatives, yielding strategies, what's catalyzed the growth in this sub sectors. So I think, It is widening of the scope of our turn. Investment strategies has been developing for some time. Part this is. A reference to maturation of the industry and investors growing more comfortable, investing illiquid alternatives, increasing their allocations and, at the same time, investment managers Mabel pursue a wider range of investment opportunities through alternate investment structures. I think them most notable Sebastian closed class at we ve seen emerge has been private credit. This is really emerge in the wake of the global financial crisis, citing as we all remember, bank balance sheets were incredibly stretched coming out of the financial crisis.
was coupled also aware in the U S, at least, and also in Europe, in a big regulatory changes which made it quite challenging and costly for banks to lend the way they had in the past. And so what resulted in with the emergence of private car. fines and non bank actors that came in to address the gap, so middle Markham We find it very difficult to access capital and, as a result, you saw the burgeoning private credit markets emerge in I think the numbers are something like forty a billion dollars and private credit in two thousand and two, a number that projected typical, or to a trillion dollars by the end of this year. So it's been pretty incredible: the growth that we ve seen there. You don't remember perspective in with rates going, lower and lower the Unity to generate amid the high single digit yields and private credit beckoning low, double J J returns, if you add a little bit of average, has been quite compelling taking these returned
frankly, rival why investors might be thinking about, and firms that target equity level returns, but from a seniority in the capital structure and said that risk return dynamic, I think, has been quite from for investors across the board, both institutional and private clients. The other the class. I imagine that, where we ve tremendous growth frankly has been growth, equity in private equity side and particularly, if you think about what's happened in technology on the venture side, an Israeli been old by I think, a change in the desire of venture back businesses to go public right and so saw a lot of these tech leaders assigned to say private for much longer and were able to find themselves using private equity capital and capital open so that lead to tremendous proliferation of growth equity, finds. You think about the fact that you know Amazon when public and ninety ninety seven with a foreign forty million dollar market chap today were there a trillion dollars you and I were able to participate in that technology sector in the growth in public expression and not as much less so true today, right and you look at these big tat
beneath your- are staying private significantly longer going public much later on their lifecycle, as we see in evaluations value thirty, forty fifty billion dollars. investors have realised that if they want to participate in that sector of the economy and the growth of that technology sector, they have to do it in a private expression, and so hence this growth equity sector has really emerged over the past decade as well. it's very hard to generalise, but something is caused cosmic, a covert nineteen but, broadly speaking, what has been the impact of the current crisis on the demand for alternatives? So as I say, and right now. I think investors are by and large taking stock of their portfolios overall right spending time evaluating. What do I currently on? What's the status of what I currently on an important one, liquidity profile. I have something Messrs you're, having a little bit to regenerate the piece of expected distributions, as well as capital calls again.
authors who are active during the financial crisis- will recall the lengthening of duration that we saw in their turn his portfolio and, frankly, the protracted. Period where they were much fear distributions and people had planned on, but an accurate and thankfully fewer capital costs as well. sending the result of this post covered, as in the short term, we might see a bit of a pause as Bastards do this diagnostic on their current exposures, but so far What we ve seen as has been that we have not seen a fall off of interest in alternatives, and investors continue to make new commitments, alternatives at a pre covert pace. Now Some of this is what I reference kind of his education of the client base, that this is a strategic, ass, a class right and not something that you market time and you need to make commitments regardless of the broader market environment- and I think investors realise this and so there pushing ahead with their commitments with this.
Standing I've bandaging your private equity portfolios as important enter degenerating that Alpha republic equity markets supply entertain. in the long term view in an if I think, back over the past year, twenty two years of my career and you think through two ok posted two thousand and one dot com bubble, people feeling well I'm very over allocated to private equity. My public equity market evaluations are down and quite concern welfare. forward and it turned out to be the best creative time, be putting money to work by two hundred and one two hundred and four and then correspondingly great time to exit right in four hundred and twenty seven. Then I think you'll see a similar dynamic in the post, o8 environment, of putting money to work through the downturn, but it probably felt the most painful, and so you know, I think, in these two major dislocations prior to combat. Having invest realize they need to stay the course, and so therefore, we have not seen as much of a pause in general, but we have seen a little bit of a narrowing and uncertain strategies right. I think climate become more selective in terms
where they want to commit capital. In the midst of the over nineteen crisis- and I think we a tremendous hunger to be. opportunistic and find ways to exhort problem lies in the delegations that we're seeing in the short term and also big secular changes that may occur in the long term as a result of the pandemic, and I think, the way were seen as most right now is just the teaching of capital four distressed opportunities. Right I think investors globally, They're gonna see companies need to restructure the may go bankrupt and that there's gonna be opportunities to be strategic capital. companies bigger through to the other side of this crisis, and so you know anecdotally, ass. They were seen that, in terms of our own frigidis solutions, funds that's been well received by clients were looking to be this type of strategic capital provider to companies with you who need about she'd help through this crisis when so battle
question of you know: what's going to happen to the longer term allocations here, nothing, we may see a little bit of a pause, but you know we haven't yet really seen that what may cause us to take another step back those I stayed. Clients have not yet seen the full impact of markdowns and their existing private equity portfolios. We all know private equity evaluations lying by at least a quarter, which Most of our clients have not yet seen the March thirty one march sloth read write and those are gonna, be right down pretty much across the board and soda. given that for some paused before they continue to be, and interest in distress strategies what is on the other big conversations you're having with clients right now. So I as one would be. Yes, g and in particular, impact investing radiance. This obviously started recovered, but continues, and I think we spend a lot of time talking investors about how to drive impact in their alternative portfolios, and you have a whole frankly new focus on impact private equity. Investing. How do we drive walked around the environment governed,
This diversity, the income gap, education, no other sectors that people care about without forego, economic returns right, and so I think that's the big here is that you can implement a private equities. Energy achieve expected. Private equity returns, while also provide hiding in doing good and providing in fact to the community, and so this has been an area. Where reason why time educating clients were women, looking to source of new investment strategies. We have a large business within G Samara, imprint team which Guess is exclusively on sourcing and judges in managers in this space, then that certainly interest your clients and in particular the next generation of our time, is, I think, the big conversation is run liquidity right. I mentioned the beginning: people taking stock of their portfolios by thing for clients it away the global financial crisis. We still client interested in being providers of liquidity. The so Are there ways to be a buyer right now secondary states in private equity and private? Really, hey portfolios, a lot about
I participated as through oriented funds right which do this on an institutional scale, but we also see clients Gonna do this fund about a one off basis than that may be participating in our kind of quarterly option: things, journalism interests there. We don T have much activity quiet, and that goes to the idea that there still pretty large bit ask spread and market a pretty stale. I think people are waiting to see where the marks shake out before they start being active liquidity providers into that market. so cuz. I imagining you're in your day job pretty covid. You spent a lot of time with clients in person, of course, on the phone a little bit, but a lot of in person, meeting relationships with clients, sort of evolved, post, covid and not being able to communicate as much as you typically would one on one. Workable. How quickly we ve all adapted to this- that this new, normal Bertha Domestic Goldman Sachs and our clients, so hiding it's not as enjoyable, not being able to be in person with a client or be face to face
being able to be over soon more you now in any type of online forum is proven, fight, effective and efficient in on. I think But given the dislocation we ve seen the rapidly changing markets and the increased volatility, the number of client engagements and client and our actions is actually up quite significantly. It and clients are more than ever, a wine to be in regular dialogue with those of us who coincide with those of us that cover clients or they can speak to specific up, communities and ending. We ve been able to adapt pretty well to doing this in a virtual environment. That's proven quite effective, so I think we ve seen our ability to connect with clients ability to get important investment opportunities to down diminish in at all. So you know, what's to webinar launch calls were doing virtual road shows, you know all those things and we were able to pin it pretty quickly, Mingled interesting is that if we continue to connect with clients this way, even once we get through the crisis
for many of our private clients. You know they're not based in the New York area, which is frankly where a lot of our continent's specialists and product exports are based. So I could see a scenario where we move from the old analogue phone call conversations with fines to doing more virtual face to face calls with I answer resume in the future. in about leading your team. What have you learned about trying to run a team remotely over the past few months, while I guess I have the benefit of having a team that I've worked with for a very long time, and so I think that was a very good foundation for going into this environment of remote work from home and I think the main lesson is really communicate and over communicate in, I think people really want to feel connected. I think it's. to make sure that they all feel as if informed as they would feel if they were sitting right next to each other our day to day. And so you know, look we ve done daily group. Zoom com,
was the bubble up and for information and posting nature. We have faced time even if its virtual every single day and I think, frankly, robbing pretty productive in this new normal and people of adapted pretty well in. I think the challenge will be, as we start to think about going to business in bringing in new people into how do we integrate them? An environment where we're not sitting, stood arm, and so you were thinking through that you right now for debt. Start to think about our summers that are coming in by uniting the most important lesson is just to be present at the beach communicating in over communicating and an outreach to your your team and checking up on them Yes, it is easier time to draw on relationship. You happen to build new ones, but but not impossible anyway, Thanks for your yesterday christen, I pleasure assigning a check That concludes this episode exchanged Goldman Sachs for listening and if you enjoyed the show we hope
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Transcript generated on 2021-07-03.