What’s Driving Growth in Alternative Asset Classes?

Episode Summary

Executive Summary: Kristen Olson explains how alternatives have evolved from a niche buyout-focused allocation into a broad strategic asset class spanning private equity, private credit, real estate, and hedge funds. She argues growth is driven by institutional adoption, client sophistication, and private-market alpha, while COVID-19 has mainly increased selectivity, distress interest, and attention to liquidity rather than reduced demand.

Main Topics: Defining alternatives and their sub-asset classes (Priority: 5/5): Olson frames alternatives as anything outside cash, public equities, and public fixed income, with major categories including private equity, private real estate, private credit, and hedge funds. She emphasizes the wide spectrum of strategies and the defining feature of limited liquidity. Structural growth in alternatives (Priority: 5/5): She attributes the expansion of alternatives to large institutional allocations from pensions, endowments, and sovereign wealth funds, plus growing adoption among private wealth clients who now think longer term and allocate more strategically. Why private equity remains central (Priority: 5/5): Olson says private equity remains the largest and most compelling alternatives sleeve because it has historically delivered alpha over public equities and can justify illiquidity through several hundred basis points of expected outperformance. Rise of private credit and growth equity (Priority: 5/5): She highlights private credit as the standout post-GFC growth story, created by constrained bank lending and strong investor demand for yield. She also points to growth equity’s expansion as more high-growth tech companies stay private longer. COVID-19 effects on allocations and behavior (Priority: 4/5): Olson says the crisis has led investors to reassess liquidity, capital calls, and distributions, but not to abandon alternatives. Demand remains resilient, with more interest in distressed strategies and opportunistic capital. ESG, impact investing, and liquidity solutions (Priority: 4/5): Client conversations are increasingly centered on ESG and impact investing, especially among the next generation, while liquidity-focused strategies such as secondaries are drawing attention as investors wait for valuations to reset. Remote client and team management (Priority: 3/5): She describes a rapid shift to virtual client engagement and remote leadership, noting increased client interaction, effective webinar-based selling, and the importance of over-communication with teams.

Key Arguments: Alternatives are best understood by exclusion and are defined by illiquidity; they can improve portfolio risk-return profiles when sized appropriately. Institutional investors drove the growth of alternatives, and private wealth clients have followed as portfolios and investment horizons have become more sophisticated. A moderate-risk U.S. taxable client at Goldman would be advised to hold nearly a 25% allocation to alternatives, with about 14.5% in private equity. Private equity continues to attract capital because it has historically outperformed public markets, with investors seeking several hundred basis points of excess return to compensate for illiquidity. Private credit has expanded rapidly because post-GFC regulation and weaker bank lending created financing gaps that private lenders filled. Growth equity has surged because major technology companies remain private longer, forcing investors to access secular growth through private-market structures. COVID-19 may temporarily slow commitments as investors assess liquidity and valuation marks, but long-term commitment to alternatives remains intact. Distressed and strategic capital opportunities are gaining traction as companies face restructuring pressure during the pandemic. ESG and impact investing are becoming central client priorities, especially for younger investors, but must still deliver expected private equity returns. Virtual client engagement has been surprisingly effective and may persist after the crisis, expanding Goldman’s ability to reach clients outside New York.

Data Points: Tenure at Goldman Sachs: 22 years - Olson says she has been at the firm for nearly 22 years, starting after Georgetown. Average pension fund allocation to alternatives: from about 11% to over 26% - She cites a decade-long rise in average pension fund alternative allocations. Record client commitments at Goldman: 2019 - She says 2019 was a record year for alternative capital commitments from Goldman clients. Recommended alternatives allocation for moderate-risk U.S. taxable client: almost 25% - Goldman’s investment strategy group recommendation cited by Olson. Private equity share within that allocation: 14.5% - Portion of the 25% alternatives allocation devoted to private equity. Private equity valuation multiple: 21 times - She references private equity valuations at the end of 2019 as remaining elevated. Private credit market size in 2000: $45 billion - Historical starting point for private credit growth. Projected private credit market size: closer to $1 trillion by the end of the year - Olson describes the dramatic expansion of private credit. Amazon IPO market cap: $440 million - Used to illustrate how public tech investing once captured growth earlier in company life cycles. Amazon current value: over $1 trillion - Illustrates the scale of long-term tech growth and the opportunity set for investors. Target return for illiquidity compensation: several hundred basis points of outperformance - Olson explains what investors expect versus public equity equivalents. Recording date: Monday, June 29, 2020 - Podcast timestamp given at the end.

Pivotal Quotes: "Alternative investments is a catch-all for really anything that's not cash or traditional asset classes like public equities or public fixed income." — Kristen Olson: Her definition of alternatives early in the conversation. "It takes time, right? It takes many years to build up to a target alternatives allocation in a portfolio. And it takes consistency, allocating year in and year out in order to get to your target." — Kristen Olson: Explaining how clients should build a strategic alternatives allocation. "We have not seen a fall off of interest in alternatives and investors continue to make new commitments to alternatives at a pre-COVID pace." — Kristen Olson: Her assessment of pandemic-era investor demand.

Implications: Alternatives remain a long-term strategic allocation, not a tactical trade. Investors should expect continued demand for private credit, growth equity, distressed, and impact strategies, while staying mindful of liquidity and delayed valuation marks.