Goldman Sachs Group Inc’s asset management arm will cut $59 billion in alternative investments that weigh on the bank’s earnings, executives told Reuters.
The Wall Street giant plans to divest its position over the next few years and replace some of these funds on the balance sheet with external capital, Julian Salisbury, chief investment officer of assets and wealth management at Goldman Sachs, told Reuters in an interview.
“I would expect to see a significant drop from current levels,” Salisbury said. “It will not be zero because we will continue to invest in and together with the fund, as opposed to individual offers on the balance sheet.”
Goldman had a dismal fourth quarter, missing Wall Street’s profit targets by a wide margin. Like other banks struggling as corporate dealmaking stalls, Goldman is laying off more than 3,000 employees in the biggest round of job cuts since the 2008 financial crisis.
The bank will provide more details on its asset plans during Goldman Sachs’ investor day on February 28, he said. Alternative assets can include private equity or real estate instead of traditional investments such as stocks and bonds.
Earnings volatility
Slimming down investment in the bank’s balance sheet can reduce volatility in earnings, said Mark Narron, senior director of North American banks at the credit rating agency Fitch Ratings. Shedding investments also cut the amount of so-called risk-weighted assets used by regulators to determine how much capital a bank must hold, he said.
Asset and wealth management Goldman Sachs posted a 39% drop in net revenue to $13.4 billion in 2022, with revenue from equity and debt investments down 93% and 63%, respectively, according to earnings announced last week.
The $59 billion in alternative investments held on the balance sheet was down from $68 billion a year earlier, the results showed. The position includes $15 billion in equity investments, $19 billion in loans and $12 billion in debt securities, along with other investments.
“Obviously, the environment for exiting assets is slower in the back half of the year, which means we may have less of a portfolio compared to 2021,” Salisbury said.
If the environment increases for the sale of assets, Salisbury said it is expected to see “a faster decline in the investment balance sheet.”
“If we’re going to have a couple of normal years, you’re going to see a reduction in incidents,” he said.
PERSONAL CREDIT
Clients are showing strong interest in personal loans because of slow capital markets, Salisbury said.
“Personal credit is attractive to people because the returns available are attractive,” he said. “Investors like the idea of having something that is a bit defensive but has a high yield in the current economic environment.”
Goldman Sachs’ asset management arm closed a $15.2 billion fund earlier this month to make junior debt investments in private equity-backed businesses.
Private credit assets across the industry have doubled to more than $1 trillion since 2015, according to data provider Preqin.
Investors also show interest in private equity funds and are looking to buy positions in the secondary market when investors sell their shares, Salisbury said.
The US investment grade primary bond market kicks off 2023 with a flurry of new deals.
The market rally has “more legs” because investors are willing to buy bonds with longer maturities while seeking higher credit quality because of the uncertain economic environment, he said.
Goldman Sachs economists expect the Federal Reserve to raise interest rates by 25 basis points each in February, March and May, then remain steady for the rest of the year, said Salisbury.
More broadly, the “chilling effect” of last year’s rate hike has dampened economic activity, Salisbury said, citing soft hiring activity and slowing growth in rents.