Goldman Sachs Group Inc’s asset management division will make significant cuts to the $59 billion in alternative investments that impacted earnings.
Alternative assets can be private equity or real estate instead of traditional investments such as stocks and bonds.
The company will divest its holdings in the coming years and replace some of those funds on its balance sheet with outside capital, said Julian Salisbury, chief investment officer of wealth and wealth management at Goldman Sachs.
“I expect a significant drop from current levels,” Salisbury told Reuters. “It’s not going to zero as we will continue to invest in and alongside funds as opposed to individual deals on the balance sheet.”
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Goldman Sachs had a poor fourth quarter, as it narrowly missed Wall Street’s earnings targets. The bank is laying off more than 3,000 employees in the largest round of layoffs since the 2008 financial crisis.
The bank’s asset and wealth management business posted a 39% decline in net income to $13.4 billion in 2022, with income from equity and debt investments falling 93% and 63% respectively, according to the report announced last week. income.
The $59 billion in alternative investments on the balance sheet fell from last year’s $68 billion, according to the results. The positions include $15 billion in equity investments, $19 billion in loans and $12 billion in debt securities, as well as other investments.
“Obviously, the asset exit environment was much slower in the second half of the year, which meant we were able to realize less gains on the portfolio compared to 2021,” Salisbury said.
Salisbury expects to see “a more rapid decline in old balance sheet investments” as the environment for asset sales improves.
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“If we had a couple of normalized years, you would see the reduction happen” over that period, he said.
He also said that clients are showing interest in private credit because of the poor capital markets.
“Private credit is interesting to people because the available returns are attractive,” Salisbury said. “Investors like the idea of owning something more defensive, but earning high returns in the current economic climate.”
Goldman Sachs’ asset management division closed a more than $15 billion fund earlier this month to make junior debt investments in private equity-backed companies. Since 2015, private sector credit assets have more than doubled to more than $1 trillion, according to data provider Preqin.
Investors are also increasingly interested in private equity funds, seeking to buy holdings in the secondary market when existing investors sell their stake, Salisbury said.
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The US investment grade primary bond market started the new year with a number of new deals.
Salisbury said the market rally has “more legs” as investors are willing to buy bonds with longer maturities while also 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.