Goldman Sachs Group Inc’s asset management division will make significant cuts to the $59 billion of alternative investments that impacted earnings.
Alternative assets may include private equity or real estate instead of traditional investments such as stocks and bonds.
The firm will divest its positions over the next few years and replace some of those funds on its balance sheet with external capital, according to Julian Salisbury, chief investment officer for capital and wealth management at Goldman Sachs.
“I would expect to see a meaningful decline from today̵[ads1]7;s levels,” Salisbury told Reuters. “It won’t go to zero because 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, missing Wall Street earnings targets by a significant margin. The bank is firing more than 3,000 employees in its biggest round of job cuts since the 2008 financial crisis.
The bank’s asset and wealth management business showed a 39% drop in net income to $13.4 billion in 2022, with income from equity and debt investments falling 93% and 63% respectively, according to results announced last week.
The $59 billion of alternative investments held on the balance sheet fell from the previous year’s $68 billion, according to the results. The positions included $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 back half, which meant we could realize smaller gains on the portfolio compared to 2021,” Salisbury said.
Salisbury expects to see “a more rapid decline in old balance sheet investments” if the environment for asset sales improves.
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“If we would have a couple of normalized years, you would see the reduction happen” over that period, he said.
He also said that customers are showing interest in private credit due to poor capital markets.
“Private credit is interesting to people because the returns available are attractive,” Salisbury said. “Investors like the idea of owning something a little more defensive but with a high yield in the current economic environment.”
Goldman Sachs’ asset management arm earlier this month closed a more than $15 billion fund to make junior debt investments in private equity-backed businesses. Private credit funds in the industry have more than doubled to more than $1 trillion since 2015, according to data provider Preqin.
Investors are also growing interested in private equity funds and are trying to buy positions in the secondary market when existing investors sell their holdings, Salisbury said.
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The US primary investment-grade bond market began the new year with a flurry of new deals.
Salisbury said the market rally has “multiple legs” because investors are willing to buy bonds with longer maturities while also looking for 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.