Goldman Sachs Sees ‘Enormous’ Private Credit Opportunity

Wall Street bank has $230bn in private credit assets.
David Solomon, chairman and chief executive of Goldman Sachs, said the bank has an enormous opportunity in private credit as it announced a partnership with a sovereign investor to co-invest in private credit opportunities throughout Asia Pacific.

Solomon said at the UBS Financial Services Conference on 27 February and said Goldman Sachs has $230bn in private credit assets.

“There is a narrative that private credit disintermediates banks but I think that is overstated,” he said. “We have an ability to take advantage of the fact that we sit in both worlds and I think that is very powerful for us.”

He continued that Goldman Sachs is going to raise its ninth large scale private equity fund this year, which will be a significant fundraising. Goldman Sachs has also just completed fundraising for an infrastructure fund and raised its first growth capital fund two years ago at $5bn.

On 26 February Goldman Sachs and Mubadala Investment Company announced they have signed a $1bn separately managed account in which Mubadala and Goldman Sachs Alternatives will co-invest in private credit opportunities across the private credit spectrum throughout Asia Pacific, with a particular focus on India. Goldman Sachs’ private credit team consists of 165 investment professionals oversees more than $110bn in assets under management.

Solomon said: “Our platform is truly global and we are in private equity, growth equity, credit and infrastructure. Very few people have that full capability with very strong performance across the spectrum of products.”

Goldman Sachs has raised $250bn in alternatives over the last five years and Solomon said the bank expects to raise another $40bn to $50bn this year, and will then continue to raise alternatives going forward.

Risk and return

The Federal Reserve estimated in a blog in February 2024 that total private credit reached nearly $1.7 trillion, comparable to leveraged loans which are roughly $1.4 trillion, and high-yield bond markets at about $1.3 trillion.

“Over the past decade, the asset class, particularly direct lending, has generated higher returns than most other comparable asset classes, including 2%-4% over syndicated leveraged loans,” added the Fed.

The US central bank continued borrowers have been willing to pay a premium for the speed and certainty of execution, agility, and customization from private lenders. In addition, private debt funds have attracted highly leveraged borrowers that are unable to get funding from heavily regulated banks.

Nearly all, 90%, of investors said private debt performance has met or exceeded their expectations according to a survey from data provider Preqin, Asset Allocation: Outlook 2024. Half, 51%, of investors intend to increase commitments, and 40% intend to keep the same amount of capital in play which Preqin said was by far the highest numbers of any asset class.

Preqin forecast an average internal rate of return in private debt of 9.8% from  2022 to 2028.

“Given its lower risk profile, this doesn’t look bad alongside venture capital  (14.3%), private equity (12.6%), secondaries (11.5%), and infrastructure (10.9%),” added Preqin.

However, Preqin also warned that if the economy slows, some companies will struggle to service debts at higher rates. The Bank of England has warned that there is significant risk in private credit markets.

Lee Foulger, director of financial stability, strategy and risk at the Bank of England said in a speech in January this year that since the financial crisis, non-banks have grown significantly as part of the UK financial system and globally, and now account for around half of UK and global financial sector assets.

He estimated that private credit has grown four-fold since 2015 to around $1.8 trillion, but could be much larger. However, much of that growth was during a long period of low interest rates.

“That means it is important that, alongside banks, the non-bank system can absorb, and not worsen, any shocks that may arise,” Foulger added.

Risks include maturity and liquidity mismatches and leverage which can help to increase potential returns or hedge those risks, but which can also amplify losses and exacerbate liquidity issues in difficult market conditions; market concentration, jumps to illiquidity, correlation and interconnectedness.

“Banks engage in repo and derivative transactions with hedge funds through their broker-dealer operations; a sudden fall in asset values could leave banks’ exposures insufficiently collateralised,” he added. “This scenario could result in losses for banks, and cause a spillover to the real economy through reduced credit provision.”

The Fed said there are other financial stability implications worth monitoring as nonbank lending continues to grow including illiquidity, rise in corporate leverage and default, deterioration in credit quality, and potential spillover to other non-bank institutions.

In addition, there are growing interconnections between private credit funds and banks as they partner to fund new deals and banks sell complex debt instruments to private fund managers in “synthetic risk transfers” in order to reduce regulatory capital charges on the loans they make

“Relatedly, there is growing concern that tighter regulations such as Basel III endgame could intensify migration of credit from banks to private credit lenders,” added the Fed. “These developments suggest that private credit will become increasingly important to credit market functioning.”

Banking and markets

Solomon continued that since the bank’s first investor day in 2020, the firm has significantly increased wallet share in banking and markets by more than 350 basis points and there is further room to grow.

“We have compounded financing revenues from our FICC and equities businesses by 15% compounded since 2019, which has put more durable revenue into those businesses,” he added.

He said investment banking activity had slowed but showed signs of improvement and he expects volumes to return to the 10-year average.

“My expectation is that those businesses will look more normal and we have billions of dollars of upside from that normalisation,” added Solomon.

Goldman Sachs’s durable revenues, which consist of management fees and financing fees, are around $20bn, or 43% of the total according to Solomon. In addition intermediation activity, capital markets activity and M&A revenues, even when volumes are at 10-year low, add another $14bn in revenue.

Solomon said that over the last two years the size of Goldman Sachs has assumed a larger revenue base than has been delivered, but management has a very strong view that base revenues will be higher.

“I think the firm is the right size and that we are making the right investments over the next three to five years for the firm to perform very well,” he added.