Private equity and venture capital-backed companies are faced with conserving cash and shoring up costs in the choppy stock market of 2022, as capital from initial public offerings and syndicated debt markets dries up, investment executives at Goldman Sachs said.
Private debt providers have been able to step in to provide capital in a challenging economic environment, as institutional investors ponder the cash requirements of businesses they support in the face of inflation and the prospects of an economic slowdown in 2023.
“There is an extreme focus on cash and cash runway — cash becomes king,” said Nishi Somaiya, global co-head of growth equity at Goldman Sachs Group Inc.
“We’re very focused on the ability to weather a more challenging environment. Growth rates will be lower, so cost bases have to be adjusted. Scenario planning is something we’re focused on.”
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Initial public offerings have evaporated in 2022 in the face of volatility and steep losses in public equities amid jitters around recession and inflation.
Even with strong gains to kick off the first days of October, the Nasdaq
has lost about 29% of its value and the S&P 500
is off by about 21%.
Leveraged loan issuance fell 19% in the first half of 2022 to $612.5 billion from $755.5 billion in the year-ago period, according to a White & Case report that cited data from Debtwire Par.
Against this backdrop, companies that had been planning to go public in the next 12 to 18 months are turning to private markets.
One additional challenge is a disconnect in private market valuations, which have yet to catch up to the more rapid downdraft in public equity prices, Somaiya said.
These companies have turned to private debt providers in some cases, while larger companies may also win financing through private structured lending products.
One bright spot for Goldman Sachs is the group of companies that raised ample capital in 2020 or 2021 and have healthy balance sheets as a result.
“Many companies overcapitalized themselves over the past two years because there was so much capital available and many don’t need to raise [fresh capital] yet,” Somaiya said. “In six to 12 months, more companies — as their cash runway starts to shorten — will come back. For us, that’s an exciting opportunity.”
Despite the stark changes in financial markets over the past year, Goldman still sees many of the same long-term investing opportunities such as the rise in global online commerce, increasing pressure on labor costs and rising consumer expectations.
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Kevin Sterling, global co-head of private credit, said rising interest rates have caused lending costs to go up for companies, which has caused “ripple effects” on deal-making.
The cost of borrowing was “very clear and very easy” up until late 2021, but nowadays “the certainty of capital is more more complicated” with more opportunities for private credit, Sterling said.
The influx of capital into private debt markets in recent years is a benefit to the overall financial system, rather than a risk, because it improves overall diversity of capital, Sterling said.
“Private credit, for the most part, is long term capital,” Sterling said. “That has some real value, especially in times of dislocation.”
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Michael Brandmeyer, global co-head and co-chief investment officer of Goldman’s Alternative Investments and Manager Selection (AIMS) unit, said private market investors are now facing their first major test in about 15 years.
The model of active management of private market positions will reveal winners and losers among private equity firms, he said.
The comments from Brandmeyer, Sterling and Somaiya came Tuesday during a media roundtable on the future of private markets hosted by Goldman Sachs.
Goldman Sachs’s firm-wide assets under supervision across public and private markets are currently about $2.5 trillion. The alternative investments within Goldman Sachs Asset Management are $445 billion, as of June 30.
Goldman’s activities in alternatives include a large buyout fund, a large secondary private equity fund business, growth equity investments, as well as private debt and its Petershill unit, which invests in minority stakes in private equity firms.
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