Navigating China's Regulatory Uncertainty...Talks at GS With Authors Gary Ginsberg and Thomas Dyja...The Rise of Continuation Funds

[Goldman Sachs]( [BRIEFINGS] August 19, 2021 How Are Investors Navigating China’s Regulatory Uncertainty? Above (L to R): Stephanie Hui, Basak Yavuz and Prakriti Sofat of Goldman Sachs Asset Management On the latest episode of Exchanges at Goldman Sachs, three members of Goldman Sachs Asset Management, Stephanie Hui, Basak Yavuz and Prakriti Sofat, joined host Allison Nathan to talk about investing in China in the current climate. Here are some highlights from their conversation: Investors may have to overlay potential investments in China with “the lens of what is good for society,” explains Hui, who leads private equity investing in Asia. “Fundamentally, people still believe that China is a very important market,” she says. “It's large. It's growing. And [recent regulatory changes are] more adjustment-targeting internally to ‘fix’ the economy so that it could be long-term sustainable.” Regulatory uncertainty may also create pockets of value, says Basak Yavuz, co-head of emerging markets equities. “I wouldn't call this ‘very cheap, let's close our eyes and buy everything,’” says Yavuz. “Having said that, we think that value is emerging in very selective subsectors.” Meanwhile, the outlook for China’s government bond market is constructive given a favorable risk-reward environment, says Prakriti Sofat, emerging market debt economist. “We expect additional reserve requirement cuts from the PBOC, given the growth headwinds in the second half of this year…And with the regulatory tightening that we have seen over the last two months or so, we think that the risk of a policy rate cut has also increased. So that sets a very supportive backdrop for China’s government bond market.” [Listen to the podcast]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=How%20Are%20Investors%20Navigating%20China%E2%80%99s%20Regulatory%20Uncertainty%3F&body=https%3A%2F%2Fyoutu.be%2FelK0AmSrNk4) Talks at GS: New York’s Recent History and Stories of ‘First Friends’ Above (L to R): Goldman Sachs president John Waldron with author Gary Ginsberg In two Talks at GS sessions last week, authors Gary Ginsberg and Thomas Dyja discussed their latest books with firm president John Waldron and chief financial officer Stephen Scherr. Ginsberg’s First Friends: The Powerful, Unsung (and Unelected) People Who Shaped Our Presidents examines the relationships between U.S. presidents and their closest confidents, while Dyja’s New York, New York, New York: Four Decades of Success, Excess, and Transformation looks at New York City’s journey from its fiscal crisis of the 1970s to its rebirth and ascension in the 21st century. Ginsberg on the influence of Thomas Jefferson’s friendship with James Madison: “Jefferson needed Madison's exacting mind and his practical nature, and Madison needed Jefferson's big, bold personality…Their friendship, if you really stop and think about it, resulted in the basic structures of our United States government today.” [Watch the episode](. Dyja on New York’s competing narratives: “At the end of the Bloomberg years…all the discourse going on about this city was very binary—gentrification, neo-liberalism bad; Giuliani saved the city with policing—all these very kind of oppositional ideas, and none of it was really describing my lived experience of the city over these times. It was much more complicated than any of those things described.” [Watch the episode](. [Watch videos]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Talks%20at%20GS%3A%20New%20York%E2%80%99s%20Recent%20History%20and%20Stories%20of%20%E2%80%9CFirst%20Friends%E2%80%9D&body=https%3A%2F%2Fwww.youtube.com%2Fplaylist%3Flist%3DPLIyiGQywEp655v2qh-3mxm2AT12EKkr6h) Briefly…on Why Private Equity Funds Are Staying Invested for Longer The private equity industry is turning to continuation funds as a way to hold on to high-performing assets for longer. We sat down with Alexander Mejia, who leads the private equity sponsor secondary market advisory within the Investment Banking Division to discuss the growing popularity of these vehicles. Alexander, what are continuation funds and how do they work? Alexander Mejia: Traditional private equity funds are typically set up with fixed 10-year terms; the sponsors’ goal is to acquire businesses, create value and ultimately sell the businesses within that period. But what we’re increasingly seeing is that more sponsors want to hold on to their investments for longer. In some cases, it’s because the investment is performing well—it’s a “trophy asset” within their portfolio and they don’t want to part ways with it. Alternatively, they want to give the business more time and money to develop, which the business may not have had, given the existing fund’s term and capital constraints. At the same time, limited partners (LPs) are increasingly focused on liquidity, especially with sponsors’ longer-dated assets, so there’s a duration mismatch between the sponsors who aren’t ready to sell those assets and the limited partners who want to monetize their investments. Continuation funds are a transaction structure that works to achieve two objectives: First, they allow private equity sponsors to provide their LPs a liquidity option—they can elect to cash out or roll into the new vehicle. Second, the funds extend the duration of their holdings and raise new capital to accelerate M&A or other growth initiatives at the underlying companies. At the end of the day, these transactions should provide a win-win outcome to all parties involved. Tell us more about why some sponsors want to hold on to their investments for longer. Alexander Mejia: In many cases, sponsors see additional room for their investments in certain companies to grow. They’ve spent years developing strong relationships with management teams and building high-quality businesses that they often sell prematurely to satisfy existing fund dynamics. Rather than sell outright, they would prefer to continue owning and growing the business. Sponsors further benefit from their ability to retain assets under management through these transactions. Lastly, given the increased competitiveness of the sponsor market, we’re seeing GPs invest alongside other investors in the continuation funds into their “trophy assets,” thereby finding unique ways to deploy new capital and increase their overall exposure to these assets. How did the pandemic affect sponsors’ interest in continuation funds? Alexander Mejia: The pandemic has been a big driver of volume, because many of the underlying portfolio companies fell behind in their growth plans and needed more time and capital to get back on track. So sponsors are using continuation funds as a way to ensure they can grow the companies to their full potential. In fact, total transaction volume in continuation funds led by general partners is expected to more than double in 2021 to about $50 billion, up from about $23 billion in 2019. And I wouldn’t be surprised to see that jump another 50% next year. There’s just tremendous momentum behind the supply of these transactions. Let’s talk about the capital that’s going into these vehicles. What does the landscape look like? Alexander Mejia: There’s been an explosion of new capital supply into this market driven by both existing secondary market investors raising new capital focused solely on continuation vehicles, as well as new entrants such as family offices and hedge funds who find the risk-adjusted returns of these vehicles particularly attractive. More recently, there has been a wave of activity by some of the world’s biggest asset managers who are now building or buying dedicated secondary platforms with the aim of leveraging existing distribution channels to raise substantial capital focused on the secondary markets. As this market continues to evolve—and I believe that we are still in the early innings—continuation funds could replace a significant portion of sponsor-to-sponsor M&A. As a result, many larger firms are raising capital to find unique ways to access these assets through the secondary market. And what about the LPs—are they being treated fairly if the sponsors decide to hold onto the assets longer? Alexander Mejia: LPs are the lifeblood of any sponsor’s franchise so extra consideration is spent ensuring these transactions are designed for and structured with their interests in mind. These transactions provide LPs with optionality—they are presented with the option to liquidate their positions or roll their interest into the new vehicle. In every situation, the sponsor hires an investment bank, such as Goldman Sachs, to run a process and get a fair value for the LPs in that transaction. If there is new dry powder that is invested as part of the continuation fund, existing LPs are also offered the right to participate on a pro rata basis so their holdings aren’t diluted. There is also full symmetry of information in the process so that LPs have everything they need to make an informed election. These are complex transactions with multiple constituents—they require specialization to manage, which is why we have built a dedicated team to focused on this effort. If managed properly, then LPs are treated fairly. [Read more Briefly Q&As]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Briefly%E2%80%A6on%20Why%20Private%20Equity%20Funds%20Are%20Staying%20Invested%20for%20Longer&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fseries%2Fbriefly%2Findex.html) Goldman Sachs Media Highlights Bloomberg - August 12 [Goldman's Courvalin on Oil Market]( (7:11) Bloomberg - August 12 [Why Goldman's Kostin Is So Bullish on U.S. Stocks]( (2:28) [Subscribe]( [Unsubscribe]( The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. To the extent this newsletter includes material from the Goldman Sachs Global Markets Division, please click [here]( for information relating to Global Markets Division material and your reliance on it. To the extent this newsletter includes material from Goldman Sachs Asset Management, please click [here]( for additional disclosures. © 2021 Goldman Sachs, All rights reserved. 200 West Street, New York, NY 10282, USA [GS.com]( | [Careers Blog]( | [Privacy and Security]( | [Terms of Use]( [Facebook]( [Twitter]( [LinkedIn]( [YouTube]( [Instagram](