Goldman Turns to ‘Make-or-Break’ Unit as Solomon Put to Test

(Bloomberg) — Goldman Sachs Group Inc.’s leaders take the stage this week hoping to turn the page on a forgettable 2022, lay out new reasons for investors to rally around the stock and quell dissatisfaction within the firm’s ranks.

After a year in which profits slumped by half and a consumer-banking strategy unraveled, executives plan to offer a more forceful case for shareholders to appreciate its $2.5 trillion asset and wealth management business. The top brass sees the unit, dubbed AWM, as critical to unlocking a higher valuation.

The Wall Street firm’s second-ever investor day comes at a critical juncture – weeks after Goldman’s leaders acknowledged a foray into consumer banking lost almost $6 billion since inception, setting off disapproving howls in the ranks and denting Chief Executive Officer David Solomon’s standing with the troops.

Though the grandiose vision for the venture has already been dismantled, investors and even insiders are waiting to hear whether all options are on the table for what’s left — and how the firm will move on.

“It’s not good to see Goldman flailing,” UBS Group AG banking analyst Brennan Hawken said in an interview. “There’s a perception that all the partners are not singing from the same hymn book. It leads investors to conclude that the CEO might be losing confidence of the partners. And that is worrying.”

The retreat from consumer banking has helped Goldman’s stock climb 7% over the past 12 months, bucking the decline of that amount in the broader S&P 500. But the company’s price-to-book ratio — comparing its market value to what the firm says its parts are worth — is hovering around 1.1. Morgan Stanley, which plowed deep into wealth management, is closer to 1.8.

Goldman isn’t expected to change its financial targets, and the opportunity in the Goldman stock “relies on a visible path to a sustainable 15% to 17% return on tangible equity,” Credit Suisse Group AG analyst Susan Katzke wrote in a research note. “Success is not embedded in the GS share price — therein lies the opportunity.”

One planned solution: reassure investors and analysts that a mini Blackstone Inc. exists inside Goldman Sachs, and that it can smooth out lumpy earnings and print profits through good times and bad — by wagering other people’s money instead of its own.

AWM has ramped up fundraising from clients, but its use of the bank’s balance sheet for investments has contributed to earnings being less predictable and more volatile. Solomon has been vowing to address that since taking over but hasn’t been doing it fast enough, according to Hawken.

“This unit is the make-or-break path to getting a higher multiple,” the analyst said. “If there’s a path to a better multiple, that’s the only path.”

1999 IPO

Back when Goldman Sachs was preparing its own public stock listing in 1999, executives wrote in a prospectus for potential investors that a pillar of the strategy would be increasing the stability of earnings — with asset management playing a key role. Almost 25 years later, the firm continues to chase that grail. 

“The idea of durable revenue or ballast has been around for a quarter of a century,” Wells Fargo analyst Mike Mayo said in an interview. “In terms of Wall Street, this is not a new objective. I would like to see more execution than words.”

For starters, executives and analysts want clarity on Goldman’s strategy for running the business. In 2020, the firm’s leadership waded into a long-running internal debate over structure, separating asset management, which caters to institutional investors, from a wealth unit targeting the world’s richest people.

Then last year it glued them back together, setting off another flurry of executives getting elevated, moved or booted out.

Lettuce Meme

Managers started privately circulating an image that swapped the face of a demoted executive into the Liz Truss-versus-lettuce meme that went viral during the UK political chaos last year, according to people with knowledge of the matter. The punchline: Will he outlast the lettuce?

AWM is now led by Marc Nachmann, who’s held leadership roles in each of Goldman’s major money-making groups since Solomon took the top job. Nachmann helped run the dealmaking unit, and in his last posting, was co-head of the trading group, the biggest revenue generator at the firm with a growing share of the financing business.

The division’s chief investment officer, Julian Salisbury, who previously led asset management, will spell out why Goldman’s investors can still outdo their peers at bigger investment firms.

While Goldman has outpaced fundraising targets set in 2020 for its alternatives business, division leaders will also seek to expand on the prowess of its private wealth business — where it’s seeking to gain market share and expand lending.

Private-wealth management posted $7.4 billion in revenue, outpacing its entire asset-management business last year, according to a Feb. 24 regulatory filing.

‘Failed a Class’

The bank will also seek to show the sustained gains in its biggest business line, global banking and markets, where a surge in earnings during the pandemic bolstered the stock.

The division is co-led by Dan Dees, a die-hard Kansas City Chiefs fan who once had a cashmere hoodie named after him by Gwyneth Paltrow’s Goop. He will put forth an argument for why the division deserves more fans when valuing Goldman’s stock.

But this investor day on Tuesday, strategy isn’t the only thing on attendees’ minds.

Mayo recently wrote a note to clients with a rare call for the board’s lead independent director to address the panel’s support of Solomon and asked whether Goldman has a morale problem after the failed foray into retail banking.

“David Solomon gets a grade of A+ for legacy businesses and a very poor grade for his extra-curricular activities,” the analyst said, pointing to the leadership’s lack of cost discipline in that initiative.

“He failed a class,” Mayo said. “What is the consequence of failing a class?”

Further reading:

Goldman Has a ‘Much Tighter Hiring Plan,’ Solomon Says

Solomon’s Pay Is Cut But His Vision Survives: Paul J. Davies

Goldman’s Last Key Consumer-Banking Hire Exits Loss-Making Group

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