Goldman Sachs Group Inc’s wealth management division will significantly reduce a $59 billion alternative investment impacting the bank’s earnings, an executive told Reuters.
Julian Salisbury, chief investment officer of wealth and wealth management at Goldman Sachs, told Reuters in an interview that the Wall Street giant plans to divest in the next few years and replace some funds. on its balance sheet with external funding.
“I would expect to see a meaningful decline from current levels,” Salisbury said. “It won’t be zero because we will continue to invest in and alongside the funds, as opposed to individual transactions on the balance sheet.”
Goldman had a dismal fourth quarter, missing Wall Street profit targets by a large margin. Like other banks struggling as corporate transactions stalled, Goldman laid off more than 3,000 employees in the biggest job cuts since the 2008 financial crisis.
He said the bank will provide more details on its wealth plan during Goldman Sachs’ investment day on Feb. Alternative assets may include private equity or real estate as opposed to traditional investments such as stocks and bonds.
Mark Narron, senior director of North American banks at credit rating agency Fitch Ratings, said reducing investments on a bank’s balance sheet could reduce volatility in earnings. bank entry. He said the cuts to investments also cut down on the number of so-called risk assets used by regulators to determine how much capital a bank must hold.
Goldman Sachs Wealth and Wealth Management posted a 39% drop in net revenue to $13.4 billion in 2022, with revenue from equity and debt investments falling 93% and 63%, respectively, according to the report. earnings were announced last week.
The results showed that the $59 billion in alternative investments held on the balance sheet was down from $68 billion a year earlier. Positions include $15 billion in equity investments, $19 billion in loans, and $12 billion in debt securities, among other investments.
“Clearly, the asset drawdown environment was much slower in the second half of the year, which means we could see less return on our portfolio than in 2021,” Salisbury said.
If the asset-selling environment improves, Salisbury said he expects to see “a faster decline in balance sheet investments.”
“If we have a couple of years of normalization, you’re going to see a drop happening,” he said.
Customers are showing a keen interest in private credit due to sluggish capital markets, said Salisbury.
“Private credit is exciting for everyone because the returns available are very attractive,” he said. “Investors like the idea of owning something a little more defensive but highly productive in the current economic climate.”
Goldman Sachs wealth management closed a $15.2 billion fund earlier this month to make debt-base investments in private equity-backed businesses.
According to data provider Preqin, private credit assets across the industry have more than doubled to more than $1 trillion since 2015.
Salisbury said investors are also showing interest in private equity funds and are looking to buy positions in the secondary market as existing investors sell their holdings.
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 due to the uncertain economic environment,” he said. .
Salisbury said Goldman Sachs economists expect the Federal Reserve to raise interest rates by 25 basis points each February, March and May, then leave them unchanged for the rest of the year.
More broadly, the “cold effect” of last year’s rate hike is starting to cool economic activity, Salisbury said, citing weaker hiring and slowing rent growth.