Goldman Sachs Group Inc’s (GS.N) asset management arm will substantially cut the $59 billion of alternative investments that hurt the bank’s earnings, an executive told reporters.
The Wall Street titan intends to divest its positions over the next couple of years and replace some of those funds on its balance sheet with outside capital, Julian Salisbury, chief investment officer of asset and wealth management at Goldman Sachs, told Reuters in an interview.
Salisbury said:
“I would expect to see a meaningful decline from the current levels. It’s not going to zero because we will continue to invest in and alongside funds, as opposed to individual deals on the balance sheet.”
Goldman had a gloomy fourth quarter, falling short of Wall Street profit targets by a big margin. Similar to other banks struggling as company dealmaking stalls, Goldman is gutting more than 3,000 employees in its biggest round of layoffs since the 2008 financial crisis.
The bank will give additional information on its asset plan during Goldman Sachs’ investor day on Feb. 28, he said. Alternative assets can include real estate or private equity as opposed to traditional investments such as bonds and stocks.
Earnings Volatility
Cutting back the investments on a bank’s balance sheet can lower volatility in its earnings, said Mark Narron, senior director of North American banks at credit rating agency Fitch Ratings. Cutting investments also reduces the amount of so-called risk-weighted assets that are used by regulators to establish the amount of capital a bank must hold, he said.
Goldman Sachs’ asset and wealth management reported a 39% drop in net revenue to $13.4 billion last year, with its revenue from equity and debt investments dipping 93% and 63%, respectively, according to its earnings posted last week.
The $59 billion of alternative investments held on the balance sheet declined from $68 billion a year ago, the results showed. The positions included$19 billion in loans, $15 billion in equity investments, and $12 billion in debt securities, together with other investments.
“Obviously, the environment for exiting assets was much slower in the back half of the year, which meant we were able to realize less gains on the portfolio compared to 2021,” Salisbury said.
If the environment becomes better for asset sales, Salisbury said he hoped to see “a faster decline in the legacy balance sheet investments.”
“If we would have a couple of normalized years, you’d see the reduction happening,” in that period, he said.
Private Credit
Clients are taking much interest in private credit given sluggish capital markets, Salisbury said.
“Private credit is interesting to people because the returns available are attractive,” he said. “Investors like the idea of owning something a little more defensive but high yielding in the current economic environment.”
Goldman Sachs’ asset management arm wound up a $15.2 billion fund earlier in January to make junior debt investments in private equity-funded businesses. Private credit assets across the industry have grown more than double to over $1 trillion since 2015, according to data provider Preqin.
Investors are also taking interest in private equity funds and are looking to buy positions in the secondary market when existing investors divest their stakes, Salisbury said.
Buy Crypto NowThe U.S. investment-grade primary bond market began in 2023 with a string of new deals. The market rally has “more legs” because investors are ready to purchase bonds with longer maturities while aiming for higher credit quality due to the uncertain economic environment, he said.
Goldman Sachs economists forecast the Federal Reserve to jack up interest rates by 25 basis points each in February, March, and May, then keep steady for the rest of the year, Salisbury said.
More broadly, the “chilling effect” of 2022’s rate hikes is beginning to cool economic activity, Salisbury said, citing slowing growth in rents and softer hiring activity.
