The asset management arm of Goldman Sachs Group Inc will make major cuts to the $59 billion in alternative investments that have impacted its earnings.
Alternative assets can include private equity or real estate instead of traditional investments like stocks and bonds.
The company will exit its positions over the next few years and replace some of those funds on its balance sheet with outside capital, according to Julian Salisbury, chief investment officer of asset and wealth management at Goldman Sachs.
“I would expect to see a significant drop from current levels,” Salisbury told Reuters. “It’s not going to zero because we will continue to invest in and alongside the funds, as opposed to individual transactions on the balance sheet.”
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Goldman Sachs had a lackluster fourth quarter, when it missed Wall Street’s profit targets by a substantial margin. The bank is laying off more than 3,000 staff in its biggest round of job cuts since the 2008 financial crisis.
The bank’s asset and wealth management saw a 39% drop in net income to $13.4 billion in 2022, with income from equity and debt investments down 93% and 63%, respectively. %, according to results announced last week.
The $59 billion in alternative investments held on the balance sheet fell from $68 billion a year earlier, the results showed. Positions included $15 billion in equity investments, $19 billion in loans and $12 billion in debt securities, as well as other investments.
“Clearly the asset exit environment was much slower in the second half of the year, meaning we were able to make less portfolio gains compared to 2021,” said Salisbury.
Salisbury expects to see “a faster decline in legacy off-balance sheet investments” if the asset sales environment improves.
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“If we had a few normalized years, you would see the reduction happening” during that time, he said.
He also said customers were showing interest in private credit due to weak capital markets.
“Private credit is attractive to people because the returns available are attractive,” Salisbury said. “Investors like the idea of owning something a little more defensive but high yielding in the current economic environment.”
The asset management arm of Goldman Sachs shut down a more than $15 billion fund earlier this month to make junior debt investments in private equity-backed companies. Private credit assets in the industry have more than doubled to more than $1 trillion since 2015, according to data provider Preqin.
Investors are also increasingly interested in private equity funds and trying to gain positions in the secondary market when existing investors sell their shares, Salisbury said.
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The US investment grade primary market entered the new year with a number of new transactions.
Salisbury said the market rally had “more legs” because investors are willing to buy bonds with longer maturities while seeking higher credit quality due to the uncertain economic environment.
Goldman Sachs economists predict the Federal Reserve will raise interest rates by 25 basis points each in February, March and May before holding steady for the rest of the year, Salisbury said.
Reuters contributed to this report.