Private equity crisis intensifies, even Goldman Sachs has to "prove their innocence"

Private Equity Crisis Worsens as Goldman Attempts to Reassure Clients, Claiming Its Largest Retail-Focused Private Credit Fund Has Relatively Low Redemption Rates and Software Sector Risk Exposure

Wall Street Journal reported that on Friday, the U.S. banking sector experienced its worst decline of the year, with the KBW Bank Index dropping as much as 6% intraday, marking the largest single-day decline since the market turbulence in April last year. Risks in the private credit sector have sharply surfaced, with multiple funds facing liquidity issues.

As the private equity crisis intensifies, Goldman Sachs sent a detailed letter to investors on Thursday stating that its Goldman Private Credit company’s corporate software exposure is approximately 15.5%, which is relatively low compared to industry peers, with a redemption rate of 3.5% in the fourth quarter, below the industry average.

This letter was further elaborated during a conference call on Friday. Vivek Bantwal, Co-Head of Global Private Credit at Goldman Sachs Asset Management, said:

“Diversifying funding sources allows for continuous capital deployment throughout the cycle.”

He also admitted:

“If we fully commit to retail channels, the scale expansion would obviously be faster.”

This move aims to boost market confidence amid a sharp deterioration in the U.S. credit markets since February. Notably, in recent days, credit risk has significantly decoupled from equity risk.

The yield spread on corporate bonds in the tech sector is at its widest level since 2007 relative to the overall investment-grade market.

Last month, a technology-focused fund under Blue Owl Capital experienced investor withdrawals, accounting for about 15.4% of net assets, sparking widespread concerns about this $1.8 trillion industry.

Goldman Sachs’ Underwriting Standards and Cautious Stance

Goldman Sachs emphasized its underwriting standards in the letter, stating that it has not lowered credit thresholds in pursuit of asset scale.

The firm noted that its borrower portfolio relies less on annual recurring revenue (ARR) valuation logic and physical interest (PIK) arrangements compared to most industry peers. These arrangements allow borrowers to use more debt to pay interest.

Bruce Richards, Chairman of Marathon Asset Management, told Bloomberg Television this week that reliance on annual recurring revenue “causes valuation multiples of related companies to be excessively high.”

Goldman’s statements align with this view, indicating a proactive approach to risk avoidance in asset selection.

One of the current market focuses when evaluating private credit funds is the risk of disruption from artificial intelligence affecting corporate software borrowers. Goldman’s letter states:

“We do not underestimate the risk of AI disruption.”

However, we believe some companies will emerge victorious from the AI reshuffle, especially those that ‘embed into core business processes’ and ‘possess proprietary data.’"

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