Breakingviews: Goldman doubles down on the wealthy, as it should

The last day of February brought the season’s first meaningful snow in Manhattan. But Goldman Sachs’ headquarters at 200 West St. were particularly warm on Tuesday as the firm hosted its second ever in-person investor day in its more than 150-year history. Top bankers, from Chief Executive David Solomon to Chief Operating Officer John Waldron, harkened a return to the old grind of servicing companies and the wealthy, after missing the mark trying to launch a business that would reach the masses. Solomon, though, might still be feeling the chill.

At the heart of his professional struggles is Marcus, the business that was meant to build out a massive consumer deposit base, using a new online platform, to reduce Goldman’s funding costs. Solomon and his colleagues talked up that unit at the first in-person investor day a few years ago. Then Co-head of Consumer and Investment Management Eric Lane said the company would “aspire to be the leading digital consumer bank.” He left a year later.

Since then, Goldman has rolled back those big plans. Solomon said on Tuesday he was considering “strategic alternatives” for its consumer business, potentially implying a sale. Instead, he indicated that the wealth business would be a “key driver for growth.” One key pillar of that plan is Goldman’s alternative assets business, which includes running buyout, private credit and real-estate investing funds. The firm’s targets imply that it would have some $470 billion in alternative assets under management by the end of next year, according to Breakingviews calculations.

That’s about half the size of Blackstone right now. Assuming Steve Schwarzman’s firm and Goldman have similar fees and cost structures associated with those assets, this one corner of Solomon’s wealth business might be worth half of Blackstone’s market capitalization, or $55 billion. Using other metrics, it could be worth less.

For example, Goldman plans to take $2 billion in management and other fees from the alternative business next year. Blackstone’s earnings from managing funds, not including its cut of the gains on the funds, are about 70% of the corresponding fees, and the company trades at 24 times the fee-related earnings that analysts expect it to generate next year. Apply those same numbers to Goldman’s targets, and Solomon’s unit would be worth $34 billion.

At the midpoint of those two estimates, the alternative asset management business alone would account for roughly a third of Goldman’s $120 billion equity value. Global banking and markets, which includes the advisory business, posted revenue of $32 billion last year. On the same multiple as Moelis and PJT Partners, that is worth nearly $100 billion. Combined, those two divisions are theoretically worth more than Goldman’s current market capitalization, without including the remaining much larger wealth-management business and what remains of the group that had tried to launch Marcus.

It’s possible that Goldman’s in-house Blackstone rival is much more lucrative than peers. That’s where the pivot becomes classically Goldman. Investing in alternative assets is highly scalable, especially alongside the bank’s existing businesses. The firm has a 19% market share in investment banking, according to Citigroup analysts. Goldman reckons it has had the world’s leading deal advisory business for two decades running. That makes it easier to source transactions for the buyout and private credit funds within the alternative unit, potentially giving those vehicles an edge.

Then there’s the money-raising side. Last year, of the $72 billion Goldman raised for alternative, a third of that came from its wealth business. That unit, in turn, can help to boost the investment bank. A Goldman private wealth manager, for example, might get a call from a business owner who wants to cash out. They could pass that on to the dealmakers, who rake in some fees from selling the business, maybe even to a fund in Goldman’s alternative unit. The entrepreneur could then give their proceeds to the wealth manager, which can then funnel a portion of it back into the alternative group.

Goldman has dabbled in this now-dubbed “One Goldman” concept before, and gave it significant airtime on Tuesday. But there are problems, including potential conflicts of interests between the teams advising companies and the investment managers that could potentially want to buy them. And the strategy is bound to irk the likes of Blackstone’s Schwarzman. Private-equity firms paid Goldman almost $1 billion in fees last year, according to data from Refinitiv. They won’t like a new, sizeable competitor with an advantage, especially one that is also making money off their deals.

Still, the valuations that firms like Blackstone command is just too attractive at this point. That makes this such an obvious move that investors might wonder what Solomon was thinking with the consumer business in the first place.

Perhaps he was trying to keep up with the Joneses. Morgan Stanley went after the average punter with its E*Trade deal. Since Solomon’s investor day three years ago, Goldman shares have increased 58%, including dividends, while Morgan Stanley is up 98%. But Solomon’s efforts to mimic that performance clashed with its DNA. Goldman’s partners have always been closest to the elite and the wealthy. When it comes to reaching outsiders, Solomon was always standing out in the cold.