David Solomon just revealed how Goldman Sachs plans to change the way it makes private-equity investments with its own money – and one analyst thinks it could be a big driver of its stock price

David Solomon

Goldman Sachs executives took a moment on the company’s fourth-quarter earnings call to explain more about their strategy for transitioning the bank’s private-investing platform to be more reliant on outside money.
While execs have touted the plan for months, it was CEO David Solomon’s description of a plank in that strategy that got analysts’ attention on Wednesday.
Solomon said as the firm makes future investments with its balance sheet, it will lean away from private-equity investments in favor of credit or infrastructure, as a way to free up precious capital from regulatory scrutiny that doesn’t like private-equity investments.
D.A. Davidson’s David Konrad said he thought the strategy was one of two mentioned on Wednesday’s earnings call that will a big driver of the stock going forward.
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Goldman Sachs executives took a moment on the company’s fourth-quarter earnings call to explain more about their strategy for transitioning the bank’s private investing platform to be more reliant on outside money.

Execs including CEO David Solomon have touted the strategy in recent months, saying Goldman is ramping up a fundraising machine to pool billions of dollars in client money and place it into funds making investments in private equity, credit, real estate, and infrastructure.

Solomon has restructured the management of the business to bring disparate teams from across the bank under one umbrella, and tapped a new team to coordinate activities across the firm.

But it was Solomon’s description of a plank in that strategy that got analysts’ attention on Wednesday.

The CEO said that as Goldman Sachs raises more outside money, it will also shift the types of investments it’s making with its own money. And in doing so it will free up a scarce resource that has been weighing down its profitability metrics.

Solomon said the bank will make fewer private-equity investments with its own money, bowing to regulators who require the bank to use more of its capital to support the investments. The bank currently manages $22 billion in public and private-equity investments, which get a dim view from authorities because they can often swing wildly from one quarter to the next.

Private-equity behemoth Blackstone, by comparison, holds just $1.8 billion in such investments, Oppenheimer & Co. analyst Chris Kotowski said on the call.

“We will continue to use balance sheet, but we will remix that balance sheet,” Solomon told analysts on Wednesday. That will include “shifting some out of equity into more credit- or infrastructure-type assets.”

The description and some other bits Solomon shared elicited a comment from Jim Mitchell, an analyst with Buckingham Research, that the explanation was “really helpful.” David Konrad, an analyst who just initiated coverage on Goldman Sachs at D.A. Davidson, said in an interview he expected the change to be a “big driver of the stock” price in future months.

“The straight private-equity investments are so tough on RWA levels and also the stress test,” Knorad said, referring to risk-weighted assets and semi-annual stress tests that dictate how much …read more

Source:: Business Insider – Finance

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