Private Markets Face Elevated Valuations, Manager Skill Gaps | GSAM Outlook

What's New

Goldman Sachs Asset Management's 2026 Investment Outlook reveals that private equity valuations have reached record highs at the median, while roughly 15% of private credit borrowers can't cover interest payments—signaling that manager selection and disciplined underwriting will separate winners from losers as exit activity accelerates.

Why It Matters

With multiple expansion unlikely and macro tailwinds fading, the era of easy returns in alternatives is over. GPs must now generate low-double-digit earnings growth through operational value creation, making the dispersion between top and bottom quartile managers wider than ever—a critical consideration for LPs evaluating commitments and monitoring existing relationships.

Big Picture Drivers

• Valuation premium: High-quality assets command justified premiums, but median holdings appear overvalued; a quarter of GPs willing to accept 11-20% discounts to exit long-held assets

• Interest rate sensitivity: 2021-2022 vintages face the most stress, having been underwritten at peak valuations before rates surged 500bps

• Exit bottleneck: Transaction activity up 43% YoY but still muted relative to NAV; resumption depends on sellers accepting warranted markdowns

• Technology advantage: Private equity's longer-term horizon positions it to capture AI/automation value better than public markets focused on near-term earnings

• Supply rationalization: VC/growth equity investor universe has consolidated post-2021 excesses, creating a more favorable buyer's market

By The Numbers

• ~15% of private credit borrowers have EBITDA below interest expense

• 10-15% annual EBITDA growth required to hit historical PE return targets

• $12T capital needed for energy transition by 2030

• $850B+ real estate debt maturing by year-end 2026

• 65% historical recovery rate in private credit defaults

Key Trends to Watch

• Credit stress migration: Borrowers with 1.0-1.5x coverage ratios face the greatest refinancing risk when loans mature, potentially requiring hybrid or equity recapitalization.

• Real estate bifurcation: Flight to quality continues with prime assets outperforming on rent growth, occupancy, and liquidity while $57B in US office remains distressed.

• Infrastructure rebalancing: Digital assets trade at 11.7x EV/EBITDA premium versus 10.2x for broader infrastructure, pushing sophisticated investors toward middle-market energy and circular economy plays.

• Exit market transparency: A more robust exit environment will expose valuation and accounting practice differences, giving LPs concrete data to evaluate GP relationships.

The Wrap

The 2026 alternatives landscape rewards precision over momentum—managers who can source quality deals, underwrite conservatively, and drive operational improvement will thrive, while those relying on multiple expansion or market beta face reckoning. LPs should prioritize manager alpha as a critical third dimension alongside risk and return.