Goldman Sachs: Drop in Funding Spread Signals Brisk Equity Selling

The funding spread, a measure of demand for long exposure through equity derivatives, has tumbled to around 70 basis points from about 130 basis points in late December, according to strategists at Goldman Sachs Group Inc. This sharp decline suggests a significant shift in institutional investors' positioning in equities, as markets rethink the Federal Reserve's interest-rate path. The large short-term move in funding indicates a change in demand trends from professional investors, potentially signaling brisk equity selling.



The narrowing price expectations gap between buyers and sellers is likely to open up more exit opportunities for private equity firms in 2025. Improved financing costs, increased deal demand, a growing pipeline of IPOs, and reduced bid-ask spread make it easier for dealmakers to price risk and facilitate transactions. This convergence of price expectations should release pent-up dealmaking and exit activity, as illustrated by the following points:

1. Improved financing costs: Falling financing costs and increased competition among lenders, such as CLO funds and private credit investors, are creating a more favorable environment for exits. For instance, debt to EBITDA multiples on US broadly syndicated loans rose to 5.1x by the end of Q3 2024, up from 4.8x in full-year 2023, indicating improved financing terms (Source: S&P Global 2024).
2. Increased deal demand: Pent-up demand from private equity firms and other investors is expected to drive deal activity in 2025. For example, Blackstone president Jonathan Gray has mentioned that the firm is preparing some of its portfolio companies for IPO, such as medical equipment supplier Medline (Source: Moonfare's 2025 Outlook).
3. Growing pipeline of IPOs: Advisers like KPMG report a building pipeline of IPOs slated for 2025, indicating that more companies are likely to go public, providing another exit route for private equity firms (Source: Moonfare's 2025 Outlook).
4. Reduced bid-ask spread: The narrowing price expectations gap between buyers and sellers is expected to reduce the bid-ask spread, making it easier for private equity firms to sell their portfolio companies to corporates and other sponsors. This is supported by a Goldman Sachs survey, where 53% of GP respondents cited valuations as a challenge to exiting investments, indicating that a narrowing gap could facilitate more exits (Source: Moonfare's 2025 Outlook).

In conclusion, the sharp decline in funding spread signals a significant shift in institutional investors' positioning in equities, potentially indicating brisk equity selling. The narrowing price expectations gap between buyers and sellers is likely to create more exit opportunities for private equity firms in 2025, as improved financing costs, increased deal demand, a growing pipeline of IPOs, and reduced bid-ask spread make it easier for dealmakers to price risk and facilitate transactions.