A key benefit of alternative investments is that their illiquidity prevents investors from making emotional, panicked decisions during market downturns. This structure forces them to "stay the course," avoiding the common pitfall of selling at the bottom.
The current stagnation in private equity exits and distributions has dampened traditional buyout fundraising. In response, investor capital is flowing into secondary funds that provide liquidity and infrastructure funds benefiting from technology trends like AI.
AI can perform tasks done by junior analysts, but this creates a long-term problem. If junior talent doesn't learn by building models and doing "grunt work," they may lack the fundamental skills and judgment needed to become effective senior leaders.
The private credit market has seen little difference in returns between managers in recent years. However, a changing economic environment is expected to create significant dispersion, where managers with superior credit selection and origination capabilities will pull away from the pack.
Goldman Sachs avoids the term "semi-liquid" because it provides false comfort. The liquidity gates on these evergreen funds are a feature, not a bug, designed to prevent fire-selling assets. They are most likely to be activated when investors are clamoring for redemptions.
Over the last five years, the average PE portfolio has not significantly outperformed global equities. Real alpha (600+ bps) is found only in the top and second quartile of managers, making elite manager selection the most critical factor for success.
The scale required for top-tier private equity manager selection is immense. Goldman Sachs employs a 400-person team that meets with nearly 700 managers each year to construct a core portfolio of fewer than 10, a 1.4% selection rate.
A robust alternative investment portfolio isn't just about adding a new asset class. Goldman Sachs emphasizes a three-pronged diversification approach: across different strategies (buyout, venture), multiple managers (GPs), and different vintage years to smooth out market cycles.