Exclusive: Goldman Sachs to cut asset management investments that weighed on earnings

NEW YORK (Reuters) – Goldman Sachs Group Inc’s (GS.N) asset management unit will slash $59 billion in alternative investments that have been weighing on the bank’s earnings, executives told Reuters .

Julian Salisbury, chief investment officer of Goldman Sachs’ wealth and wealth management division, said in an interview with Reuters that the Wall Street giant will sell positions over the next few years, reducing the share of these funds on its balance sheet. He said he plans to replace some of it with outside capital.

“We’re going to see a significant decline from current levels,” Salisbury said. “It never goes to zero because we continue to invest in funds in parallel with investing as opposed to individual transactions on the balance sheet.”

Goldman’s fourth quarter was dismal, falling well short of Wall Street earnings targets. Like other banks, corporate dealmaking is stagnating and struggling.

The bank plans to announce details of its wealth plan at Goldman Sachs Investor Day on Feb. 28, he said. Alternative assets may include private equity and real estate, as opposed to traditional investments such as stocks and bonds.

Earnings volatility

Mark Naron, senior director of North American banks at credit rating agency Fitch Ratings, said reducing investment in banks’ balance sheets could reduce earnings volatility. Cutting investments will also reduce the amount of so-called risk-weighted assets that regulators use to determine how much capital banks must hold, he said.

Goldman Sachs Asset & Wealth Management saw net revenues fall 39% to $13.4 billion in 2022, with earnings from equity and debt investments of 93 each, according to earnings released last week. % and 63%.

Results showed that $59 billion in alternative investments held on the balance sheet was down from $68 billion a year earlier. The positions included $15 billion in equity investments, $19 billion in loans, $12 billion in bonds and other investments.

“Obviously, the environment for selling assets has become much slower in the second half of the year, resulting in less profitable portfolios compared to 2021,” Salisbury said.

Salisbury said he expects “traditional balance sheet investment declines to accelerate” if conditions for asset sales improve.

“If you have a few years of normalization, you’ll see a decline in that period,” he said.

private credit

Clients are showing strong interest in private credit, Salisbury said, given the weak capital markets.

“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 with higher yields in the current economic environment.”

Goldman Sachs’ asset management unit 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 more than doubled to over $1 trillion since 2015, according to data provider Preqin.

Investors are also showing interest in private equity funds, looking to buy positions in the secondary market when existing investors sell their holdings, Salisbury said.

The US investment grade primary bond market kicked off 2023 with a flood of new deals.

The market rally has “more footprints” as investors are willing to buy longer maturity bonds while seeking higher credit quality due to the uncertain economic environment, he said.

Economists at Goldman Sachs expect the Federal Reserve to raise interest rates by 25 basis points each in February, March and May and hold them there thereafter, Salisbury said. there is

Salisbury said the “cooling effect” of last year’s rate hikes was starting to cool economic activity, citing weaker employment activity and slower rent growth.

Reported by Sayed Azhar. Edited by Megan Davies, Lananh Nguyen and Lisa Shumaker

Our Standards: Thomson Reuters Trust Principles.

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