Goldman’s Salisbury: More work is needed to democratise alternatives

Asset managers are having to make compromises when it comes to offering products within the current regulatory environment, Julian Salisbury, CIO for asset and wealth management, tells PEI.

More needs to be done to grant retail and individual investors access to higher-performing asset classes such as private equity, according to a top Goldman Sachs Asset Management executive.

Julian Salisbury, who oversees roughly $450 billion in alternative assets as chief investment officer for asset and wealth management, told Private Equity International that regulatory frameworks need to be improved to help broaden alternatives products for such investors.

“As we move towards a world where people have more defined contribution pension plans [and] more personal savings plans, right now, they really don’t have access to alternatives,” Salisbury said. “It’s important that we democratise access to assets that generate higher rates of return in order to allow people to save for their retirement.”

Private equity is slowly coming downstream. In 2020, the US Department of Labor decided that DC pension plans, which hold more than $7.5 trillion in assets, could incorporate certain private equity products without violating the law, providing a green light to firms keen to market DC plan-compatible products that offer the regular liquidity and daily reporting of a mutual fund.

The current regulatory environment means asset managers such as GSAM have to make “compromises” when it comes to offering products within the regulatory framework, Salisbury said.

“The regulatory environment makes it difficult to offer products that really balance the liquidity of the underlying assets with the liquidity afforded to the investor,” he said. “There needs to be continued work to figure out [how] regulations [can] evolve in such a way to make alternatives available to a broader group of people.”

There have been some recent pushes to make it easier for non-institutional capital to access private markets. Notably, in the EU, products such as the European Long-Term Investment Fund have been created to give the fund management industry a channel to market private equity, private debt, infrastructure and real estate to both professional and retail investors.

In the UK, Long-Term Asset Fund structures have been introduced to allow DC pension plans and retail investors to invest efficiently in long-term, illiquid assets via an open-ended vehicle.

Rising rates

Salisbury also commented on the current fundraising environment, noting that in a higher interest rate environment, value creation is more important than ever.

“It really puts an onus on private equity firms being able to prove their value through the value they can add at the portfolio company level,” he said. The strategy of buying a company, leveraging it, re-leveraging it and then hoping to sell it at a higher multiple is no longer viable, he added.

“In an environment like this [where] activity levels are a little bit lower, it gives you the opportunity to double down and refocus your efforts on driving value on what you already own: looking at accretive acquisitions, looking at accretive investments in those companies to compound and drive returns.”

Returns will be more “muted” over the next few quarters, Salisbury noted.

“I think what you’ll see for the industry overall is a more muted period of [net asset value] accretion [and] people needing to hold assets a little bit longer in order to generate returns.”

GSAM has raised at least $30.1 billion over the past seven months across final closes for its flagship buyout, debut growth and mezzanine vehicles. This includes $9.7 billion for West Street Capital Partners VIII and $5.2 billion for West Street Global Partners I – one of the largest debut growth funds ever raised.

Growth areas

Private credit and secondaries are “areas of real focus and interest” for Goldman’s clients, Salisbury said.

“The nominal rate that you’re now earning on private credit has similarly moved up much higher now,” he said. “In senior secured private credit, you could be generating a high single-digit, even low double-digit, return, which is pretty attractive for a range of investors.”

GSAM’s secondaries business has evaluated over $1 trillion of transactions, more than 12,000 funds and executes 50 to 100 transactions per year, according to details shared in its investor day presentation on 28 February.

Salisbury said that private credit secondaries – a nascent sub-asset class within secondaries – is an area his firm is working on.

“We have a traditional private equity fund; we have a real estate secondaries fund; we have an infrastructure secondaries fund; we’re a primary participant in credit funds through our AIMS business. It’s a very natural extension that we would look at credit secondaries.”

While the total addressable market for credit secondaries is likely smaller than that of private equity, secondaries trading in private debt will grow, he added.

“Credit secondaries was practically zero a year or two ago. I suspect it will grow meaningfully as an asset class.”

Credit secondaries has been a developing area over the past year. Last month, Ares Management and Mubadala Investment Company disclosed a tie-up involving a roughly $1 billion pool of capital for a joint venture focusing on the strategy. The joint venture will focus on both LP stake portfolios of credit funds and GP-led processes.

Apollo Global Management had committed more than $1 billion into equity and credit secondaries over the six months to when it reported its full-year earnings in February. Meanwhile, Tikehau Capital in February raised a $300 million collateralised fund obligation backed by cashflows from commitments to its direct lending and private debt secondaries strategies.

Last year, secondaries firms Coller Capital and Pantheon both raised credit secondaries funds, with the former collecting $1.4 billion for Coller Credit Opportunities I and the latter closing on a pair of credit secondaries vehicles.

Credit secondaries deal volume has grown in recent years, accounting for 4 percent, or around $4.4 billion, of total secondaries volume last year, according to data from Greenhill. Five years prior, when the adviser published its volume report for 2017, it did not include deal volume data for private credit funds.

Pricing for credit fund stakes was above average for all asset classes last year, with interests trading at 83 percent of NAV, compared with 81 percent of NAV for all strategies, according to Greenhill data. By comparison, buyout funds traded at an average 84 percent of NAV.

According to Salisbury, Goldman sometimes uses secondaries technology to help with its own fundraising by offering additional exposure to its LPs. Examples of this in the past have involved real estate, credit or growth assets where Goldman offers a strip of exposure to positions to its LPs, in exchange for the LPs committing to a fund the firm is raising.

“[We’re] using those assets strategically to facilitate the growth of our client franchise,” Salisbury said.

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