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[BRIEFINGS]
February 18, 2020
Investment Outlook 2020
As the bull market closes in on a record 11 years this March, investors in US equities might think there’s little upside left in their portfolios. But Sharmin Mossavar-Rahmani, chief investment officer of Goldman Sachs Wealth Management, counsels otherwise. In the latest episode of Exchanges at Goldman Sachs, she talks about her 2020 Investment Outlook and why she and her team are taking a “stay invested” position. “There’s still a lot of upside left if we are still a ways away from a recession,” Mossavar-Rahmani says, and “the probability of a recession [in 2020] in our view is actually quite low. We’re at about 20 to 25 percent probability, maybe a little bit closer to 20.” The Investment Outlook cites data showing a high likelihood (87%) of positive returns when an economy is in an expansion. Even when a recession is lurking around the corner, there’s still time for the market to do well—historically, there have been attractive S&P returns (8-9%) in the six to 18 months prior to a contraction. “That suggests we should stay invested,” Mossavar-Rahmani says, “because the likelihood of positive returns—and strong positive returns—is quite high.”
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Investing in Climate Change
Climate change is such a complex, global problem that meaningful action can seem daunting. But the experts Allison Nathan interviews in the latest episode of our Top of Mind at Goldman Sachs podcast agree on a place to start: setting a price on carbon. “A lot of the current rules and regulations focus on the source of the carbon—the utility, the car, or the oil,” Goldman Sachs’ head of research Steve Strongin said. “With a carbon price, other people can make the investment and solve the problem, so that you get specialization by who’s best at solving the problem, as opposed to specialization based on who’s causing the problem.” But there’s debate about the best way to establish a carbon price–via carbon taxes, which effectively assign a price for carbon; or via cap-and-trade programs, which set a limit on emissions and enable participants to trade emissions allowances under the cap. The Environmental Defense Fund’s Nat Keohane told Nathan he favors the latter because it ensures progress towards the ultimate goal of reducing emissions: “I always say we need a limit and a price on greenhouse gas emissions. The advantage of cap and trade is that it integrates the limit and the price directly into the policy design. The cap provides a limit on emissions and the trading gives rise to the price.” Michael Greenstone, director of the Energy Policy Institute at the University of Chicago, is relatively agnostic between the two approaches, recognizing the trade-offs inherent in both: “The primary advantage of a cap-and-trade program is that you have certainty on emissions and the primary advantage of a carbon tax is that you have certainty on price. You can't have both—that's the problem.”
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Talks at GS: David Katz, Founder and CEO of The Plastic Bank
Above (L to R): Dermot McDonogh of Goldman Sachs and David Katz of The Plastic Bank
When he established the Plastic Bank in 2013, David Katz wanted to combat two issues he sees as going hand-in-hand: poverty and plastic pollution in the world’s oceans. To do that, Katz created a novel way of aiding the poor while cleaning up the planet: “We’ve created a monetary system that uses plastic as an input,” he said during a recent episode of Talks at GS. The bank offers school tuition, medical insurance, pharmaceuticals and other goods and services in exchange for plastic waste that people collect around the world. “The Plastic Bank is best exemplified as a chain of stores for the world’s poor where everything can be purchased using plastic garbage,” Katz said. The Plastic Bank’s first operation was in Haiti, the poorest country in the Western Hemisphere. “Within Haiti, having schools as collection locations [for plastic waste] allows a family to return the household material to the school to pay for the tuition, because now the plastic is not just plastic. It’s $20 a month that pays for the tuition,” Katz said. “But for the family, it’s the end of poverty -- and that’s priceless.”
Click [here]( for the latest round of highlights from Talks at GS, and be sure to stream new episodes on Hulu, Amazon Prime Video, YouTube, Apple Podcasts, Spotify, iHeartRadio, and Soundcloud.
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Briefly…on the Outlook for Private Equity Market Activity
With record levels of cash, private equity firms appear poised for another solid year. We recently sat down with Goldman Sachs’ Pete Lyon, who runs the firm’s global sponsors franchise, to discuss his outlook for the private equity industry this year.
Pete, you recently rejoined the Financial and Strategic Investors Group, which works with large private equity firms and an increasingly diverse set of investors (also known as financial sponsors) looking to invest in the private markets. How would you describe the state of the private equity industry today?
Pete Lyon: Investors are continuing to allocate money into the private equity and credit markets and broader alternative asset classes as they seek out returns that can outpace those in the public markets on a risk adjusted basis. Buyout fundraising both globally and in North America hit record highs in 2019 at $371 billion and $263 billion, respectively, according to PitchBook. While valuations are elevated, sponsor-related M&A activity is still strong—though down in 2019 from record 2018 levels—as buyers compete for high-quality assets in a competitive market. In particular, large deals are dominating global activity while sponsors are turning to the public markets to source investment opportunities. The number of take-privates, for example, was up 25% in 2019 versus 2018.
What’s driving the growth in the industry?
Pete Lyon: There are a number of secular tailwinds that are fueling the importance of private markets. For one, companies are staying private longer, given the access to capital and the ability to grow their business out of the public spotlight. At the same time, more regions and other asset classes, such as credit, are opening up to private capital flow. We’re also seeing emerging buyers—such as sovereign wealth funds, pension funds, family offices, and energy funds, among others—investing in the private markets for higher returns.
What are some of the top client concerns?
Pete Lyon: After last year’s fundraising records, financial sponsors are sitting on a record amount of uninvested capital. As a result, many are facing pressure by their capital sources to deploy that capital. The dichotomy we are paying close attention to this year is that pressure in context of the upcoming U.S. presidential election and concerns of a possible slowing in global economic activity. On balance, most investors want to be in and out of the market before the start of the Democratic and Republican conventions this summer, as they weigh the risk of political uncertainty and volatility later in the year. And while “late cycle” concerns seem to have subsided as the risk of a 2020 recession remains low, many sponsors are working with their management teams to lay the groundwork preparation in their portfolios for an eventual global recession.
What does 2020 bring for the private equity industry?
Pete Lyon: So far we are seeing healthy deal flow, and early data shows no signs of a slowdown in fundraising. We saw a lot of pitch activity in January and toward the end of 2019, which is fueling the M&A pipeline at a time when conditions for the financing markets are more attractive now than late last year. We expect to see continued competition for high-quality companies, and the IPO market is open for private companies with proven business models that can generate sustainable, profitable growth. For our part, we’re working with financial sponsors to find more ways to generate returns and provide liquidity through, for example, the sale of a minority stake or by rolling over assets into a new (“continuation”) fund. Additionally, sponsors are evaluating ways to improve their investments, whether it is through add-on deals or “buy-and-build” acquisitions—a strategy used by firms to synergistically merge companies in the same sector before selling the larger company at a later date. We continue to leverage our expertise across products, markets, sectors, and disciplines to deliver the firm to this important and growing client base.
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Goldman Sachs Media Highlights
Bloomberg - February 13
[The Woman Rising From Goldman Trader to Its Face on Wall Street](
Time - February 13
[A Group of Big Businesses is Backing a Carbon Tax](
CNBC - February 12
[Watch CNBC’s full interview with Goldman Sachs CEO David Solomon]( (6:58)
CNBC - February 12
[Goldman’s Heath Terry on e-commerce and Lyft]( (5:05)
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