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Goldman Sachs raked in record asset management revenues in the last quarter thanks to a company that invests the equity of the Wall Street bank. But rather than expanding it, Goldman is looking to downsize the company.
The U.S. bank said it hoped to reduce its portfolio of “equity investments” by nearly 20%, turning instead to fees from clients such as pension funds and high net worth individuals to generate more income from management. ‘assets.
Goldman’s strategy aims to appeal to regulators and investors. Both camps view the bank’s stock investments as risky and unpredictable, which means Goldman has to hold more capital against its assets and is struggling to convince investors looking for stable returns.
“The reality is that the vast majority of revenue this quarter [in asset management] came from the equity investment line, ”said Christian Bolu, banking analyst at Autonomous Research. “It was a really big number and it’s clearly not sustainable.”
Equity investments generated $ 3.7 billion in revenue for Goldman in the second quarter of this year, which the bank described as a record high. Its performance generated a record total revenue of $ 5.1 billion for its asset management division, helping the bank beat analyst estimates and surpass money from its formidable banking divisions. ‘investment and trading.
Goldman’s plans for the company show how David Solomon, the bank’s chief executive since 2018, has sacrificed potentially lucrative but riskier parts of its operations in the hope of raising its share price and easing pressures. requests from regulators. The Federal Reserve requires Goldman to hold a greater amount of capital in proportion to its risk-weighted assets than other U.S. banks.
Balance sheet investing, which has brought together different divisions of the bank over the years, sprouted as Goldman operated in partnership before its IPO in 1999. Goldman would use its own capital and the funds of its partners to make investments.
It was a merger of the private equity-type transactions the bank still conducts as well as “exclusive negotiations” of stocks and bonds prohibited by the Volcker rule, which is part of the Dodd-Frank reform package. banking post-financial crisis.
In the three months ending at the end of June, Goldman made billions of dollars in earnings through investments in private companies ranging from the Brazilian network of cancer clinics Oncoclínicas to the messaging software group Zipwhip. The bank’s holdings in public companies such as Flywire and Privia Health, in which Goldman had invested prior to their IPOs, also appreciated.
Overall revenue for the asset management division grew 144 percent year-on-year and 11 percent quarter-on-quarter. But excluding equity investment gains, income grew 20% yoy more modestly and 5% qoq, underscoring the more gradual growth in commission income.
The challenge for Goldman is that it “does not benefit from the valuation of the gains generated by the portfolio,” said Gerard Cassidy, analyst at RBC Capital Markets. Investors would prefer it to rely more on money management fees, he said.
On its Investor Day last year, Goldman presented a plan to reduce the size of the equity investment portfolio from $ 22 billion to $ 18 billion over the next five years.
“We will continue to invest via the balance sheet and the capital of the partners. But as we reduce capital intensity and the balance sheet, that will be replaced by more sustainable fees, ”said a senior Goldman executive.
To increase its commission income, Goldman last year set a goal for the next five years to raise $ 150 billion for alternative asset management vehicles, which include private equity, credit and real estate. . The bank has recorded net inflows in asset management of more than $ 70 billion since early 2020.
“It’s important to note the growth in management fees across the rest of the business,” said Dan Fannon, analyst at Jefferies.
Still, reducing the company to $ 18 billion is proving difficult as Goldman’s investments skyrocket. At the end of the second quarter, its equity portfolio grew 5% to $ 21 billion, as $ 5.5 billion in asset sales were offset by $ 5 billion in investment appreciation as well. that $ 1.5 billion in new investment. This took the bank away from its goal of $ 18 billion.
Goldman has a “line of sight” on about $ 3 billion in sales of private assets that would help the bank reduce another $ 1 billion from its balance sheet, Stephen Scherr, Goldman’s chief financial officer, said on the call. of the bank’s results last month.
“The biggest problem they have right now is that the gains are so big that they are unable to shrink the portfolio,” Autonomous Research’s Bolu said.
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