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

Private Equity Crisis Worsens as Goldman Attempts to Calm Investors, Saying Its Largest Retail-Oriented Private Credit Fund Has Relatively Low Redemption Rates and Software Industry Risk Exposure

Wall Street Journal reports 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 drop 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 about 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 explained during a conference call on Friday. Vivek Bantwal, Co-Head of Global Private Credit at Goldman Sachs Asset Management, said:

By diversifying funding sources, we can continuously deploy capital throughout the cycle.

He also admitted:

If we fully focus on retail channels, the scale expansion will obviously be faster.

This move aims to boost market confidence, as the U.S. credit market has sharply deteriorated since February. Notably, in recent days, credit risk has significantly decoupled from equity risk.

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

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 indicated 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 TV 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, demonstrating its proactive risk avoidance in asset selection.

The risk of AI disruption faced by corporate software borrowers is another focus for the market when evaluating private credit funds. The Goldman letter states:

We do not underestimate the risk of AI disruption.

It also notes that Goldman believes some companies will succeed in the AI reshuffle, focusing on those “embedded in core business processes” and “possessing proprietary data.”

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