Mid-market financial firms will be forced to close or consolidate in coming months because of economic pressures, according to Goldman Sachs Asset Management executives.

Many of these firms will not be able to meet their capital goals, the executives said during a webinar sponsored by Goldman Sachs Asset Management entitled “Alternatives Diagnostic Survey, Charting New Routes.” The discussion centered on a survey of 235 general and limited partners of private equity firms. 

“Some mid-market firms are going to be forced to fold because the owners will not be able to shrink their firms effectively,” said Michael J. Brandmeyer, global head and chief investment officer of Goldman's external investing group.

Private equity investors are more optimistic about investment opportunities than they were last year, as inflation has moderated and valuations have begun to adjust, the survey showed.

Geopolitical risks have risen to the number one concern in this year’s survey and a potential recession and inflation have declined to second and third places respectively, said Dan Murphy, Goldman's managing director for  alternatives capital formation.

Both limited partners and general partners expressed growing optimism across asset classes compared with last year.

“The economy in general is good and interest rates are starting to come down,” Murphy said. “The backlog of potential mergers and acquisitions is going to ease going forward.”

“Limited partners have been consistently positive as the fear of a hard landing from a potential recession has lessened. As interest rates are coming down, they are breathing a sigh of relief,” said Jeffrey M. Fine, global co-head of alternatives capital formation at  Goldman Sachs Asset Management.

“Great buying opportunities will emerge in the next 12 to 18 months and investors will start to lean forward into private equity and real estate,” which will continue to shift from office buildings to much-needed housing,” Fine said.

The thing to watch, according to Fine, is the increased activity in firm acquisitions that is coming.

In addition, as global sentiment about the economy improves, general partners indicated they will be exploring more investing and acquisition opportunities, according to Stephanie Rader, global co-head of alternatives capital formation at Goldman Sachs Asset Management.

Nearly half of the survey participants said they are below their investment allocations. “The market is very competitive right now,” she said.

Although generally more optimistic than they were at this time last year, limited partners said the private equity firms they are invested in are under allocated to alternative asset classes and the firms “are building toward targets thoughtfully,” the survey report said.

“The private markets industry continues to evolve, with general partners indicating they are expanding their offerings and evaluating the use of an equity stake sale” to capitalize on asset availability, the survey said.