Overview of Masters in Business — "Alternate Investing" (guest: Kristen Olson)
This episode of Masters in Business (host Barry Ritholtz) features Kristen Olson, Goldman Sachs’ Global Head of Alternatives for Wealth (27 years at Goldman; 24 years running alts for wealth clients). The conversation walks through the evolution and structure of alternative investments (private equity, private credit, real assets, secondaries, continuation vehicles and more), how advisers implement alts for individual and ultra‑high‑net‑worth clients, manager selection/due diligence, current demand themes (AI, life sciences, private credit, infrastructure/data centers), and practical guidance on allocation, liquidity management and risks (including the rise of evergreen/open‑ended vehicles).
Key topics discussed
- Definition and scope of “alternatives”: hedge funds; private equity (buyout, growth, venture); private credit (direct lending, hybrid, distressed); real assets (real estate, infrastructure, digital infrastructure, data centers); secondaries; co‑investments; GP‑led continuation vehicles; evergreen/open‑ended vehicles.
- Goldman Sachs’ alternatives franchise: >$500 billion in alternative assets; 30+ years of private investing for wealth clients.
- Allocation guidance: Goldman’s starting point for a “moderate‑risk” client is ~27% in alternatives; industry discussion of portfolio mixes (e.g., 60/20/20).
- Capital commitment mechanics: closed‑end private funds typically call capital over ~5 years and have ~10‑year lives; laddering commitments across vintages is required to build target exposure.
- Implementation methods: in‑house Goldman strategies, open architecture (external managers), fund‑of‑funds, secondaries, co‑investments, single‑name curated access.
- Manager selection & due diligence: dedicated External Investing Group (~400 people globally; ~250 on manager selection/diligence); multi‑month diligence and investment‑committee approval.
- Diversification vectors for alts: by strategy, by manager, and by vintage year.
- Demand themes: private credit (yield), secondaries (diversification and discounted entry), infrastructure/digital real assets (data centers, energy transition), and AI + sector convergence (AI’s impact on life sciences, healthcare, and across private holdings).
- Risks and structural concerns: illiquidity, cash drag, origination capacity for large evergreen funds, and potential performance divergence/redemption dynamics in new perpetual structures.
Notable data & soundbites
- Goldman Sachs alternatives assets: over $500 billion.
- Typical time to IPO for companies: ~10 years (companies staying private longer).
- Closed‑end private funds: investments made mostly in first ~5 years; harvest in later years; 10‑year fund life common.
- Target allocation (example): Goldman recommends ~27% alts for a “moderate” investor.
- Survey referenced: inaugural survey of ~1,000 investors (≥$1M investable assets); 59% of wealth in that sample is professionally managed.
- Due diligence team scope: External Investing Group ~400 global employees; ~250 focused on manager selection/diligence.
Representative quotes/paraphrases:
- “If I’m tying my money up in a 10‑year private equity fund, I want to be paid for that illiquidity” — expectation of several hundred basis points of premium vs public benchmarks.
- “Diversification in alts is by strategy, by manager, and by vintage year.”
- “Evergreen funds: if more capital comes in than can be invested, you’ll start diluting returns via cash drag.”
Main takeaways for investors & advisors
- Consider a meaningful allocation to alternatives (Goldman’s working example: ~20–27% for many investors who can tolerate illiquidity).
- Building target exposure is a multi‑year process: ladder commitments annually (programmatic, vintage diversification) rather than market timing.
- Don’t sit in cash waiting for capital calls — maintain invested assets while reserving short‑term liquidity for expected calls to avoid return dilution.
- Use professional diligence/advisory capabilities: manager selection and risk assessment in private markets require specialized teams and time.
- Diversify within alternatives:
- Across strategies (private equity, private credit, real assets, secondaries).
- Across managers (avoid single‑manager concentration).
- Across vintage years (regular commitments to avoid timing risk).
- Private credit and secondaries are currently attractive to many wealth clients (yield and instant/diversified exposure respectively).
- Real assets/infrastructure have evolved: now include digital infrastructure, data centers, labs and energy transition assets — useful for inflation protection and structural demand from AI.
- Beware structural risks in new evergreen/open‑ended vehicles: monitor fund size, deployment/origination capacity, and how flows may create cash drag or force allocation compromises.
Practical recommendations (action items)
For investors:
- Decide whether you can tolerate illiquidity. If yes, target a phased plan toward a persistent allocation (e.g., 20–27%) rather than one‑time market timing.
- Work with an advisor or platform that provides robust manager diligence and programmatic commitment planning.
- Favor vintage diversification — commit consistently each year to avoid market timing.
- Consider secondaries for faster, diversified exposure and potential discounts; consider private credit for income needs.
For advisors:
- Build or partner for a strong due diligence capability (manager, legal, operational).
- Educate clients on structure differences (closed‑end vs evergreen), capital call dynamics, expected time horizons and illiquidity premiums.
- Use scenario planning/laddering models to show clients how commitments and calls will unfold over 5–10 years.
- Track and challenge large evergreen vehicles on origination pipeline and potential cash drag.
Risks & warnings raised
- Illiquidity risk: private funds tie up capital long term — ensure compensation (illiquidity premium) and that clients accept time horizon.
- Cash drag/dilution: large flows into evergreen funds without sufficient origination may lower returns.
- Concentration risk: single manager or single vintage concentration is dangerous in private markets.
- New product risk: performance divergence among open‑ended alternatives is unproven — investors may redeem if performance disappoints.
- Information/misinformation: younger investors may rely on social media for investment education — advisors must counteract poor advice with proper client education.
Guest background & perspective
- Kristen Olson: Goldman Sachs lifer, joined after Georgetown, started in FIG/investment banking, moved into special investments (alternatives), now Global Head of Alternatives for Wealth. Credits mentorship (Eric Lane), enjoys the dynamism of alternatives and the opportunity to capitalize on market dislocations.
- Reading & media: enjoys Walter Isaacson biographies and podcasts like SmartLess; watches Scandal for TV.
- Advice to grads: use the abundant information available, prepare, and network confidently.
Quick reference — what to watch next / follow up topics (for listeners)
- Learn more about secondaries and GP‑led continuation vehicles (how they work, pros/cons).
- Understand private credit risk profiles (seniority, covenants, yield vs public fixed income).
- Track the growth and structure of evergreen/open‑ended alts and any performance divergence over the coming years.
- Explore infrastructure/digital real asset opportunities tied to AI and energy transition (data centers, labs, renewables).
This summary captures the main themes, numbers, practical advice and structural cautions Kristen Olson shared about bringing alternatives to wealth clients and the evolving private markets landscape.