On Sunday (Sept 27), GS announced that it will hire up to 200 staff to build its asset management business. Earlier on April 13, 2009, Goldman Sachs Asset Management raised its fifth dedicated private equity secondaries fund, GS Vintage Fund V, with about $5.5 billion in capital commitments. So is GS betting on asset management industry to drive its growth?
GS is making the move even as the company's peers such as Barclays plc have scaled back their global asset management operations amid a decline in revenue and assets and after they failed to achieve economies of scale. Barclays is soon to complete the sale of Barclays Global Investors to investment management company BlackRock Inc. (BLK) for $13.5 billion. The cash and stock transaction will create the world's largest asset management firm with combined assets under management of over $2.7 trillion. It appears counter-logic that at a time when its competitors are scaling back, GS is scaling up in asset management industry.
Going by historical developments, I would say Goldman Sach's move is not counter logic and that it is betting on asset management industry at the right time.
Many of the most important opportunities and successes in Goldman Sachs' history came about during times of stress. During the Asian crisis at the end of the last decade, GS made several significant investments in consumer and real estate assets. After the dislocation that followed Long Term Capital Management's problems in 1998, GS increased its fixed income market share. Following the telecom and technology bubble, the company built up its private equity and mezzanine investments. After the failure of Enron when capital was scarce in the power sector, GS invested in power plants, resulting in recurring trading revenues as well as gains from restructuring power contracts. In each instance, Goldman Sachs was able to identify opportunities during times of market dislocation. In this same vein, I see GS trying to make a killing in asset management industry.
At the start of 2007, reports from many research institutions predicted that global asset management industry would continue its stellar growth in 2008 and 2009. Many global asset management companies went on offensive during 2007. But we have seen a double digit contraction in 2008. Following that some of the major players have retreated/or have been retreating from that market. Precisely at such crisis times, GS goes on offensive making a killing.
In July, Goldman Sachs had reported asset management and securities services revenues for the second quarter of $1.54 billion, down 28% from the year-ago quarter. Asset Management net revenues were down 21% to $922 million, reflecting lower assets under management, principally due to market depreciation since the end of 2008 second quarter. Yet, the company's assets under management, however, increased by $48 billion to $819 billion in the second quarter and benefited by $42 billion of market appreciation, primarily in equity and fixed income assets, and $6 billion of net inflows. GS knows that asset management revenues were down more due to cyclical nature and the hard times that the industry is facing. Soon or later, normalcy would return to asset management industry which should help GS more than recoup the proportionate gains from its aggressive investments in the asset management industry.
Global asset management industry long term growth rate is definitely declining. While the industry registered a compounded annual growth rate (CAGR) in excess of 5% during 2004-2008, CAGR for 2008-2013 would be more likely to be less than 4%. However, there will be profitable pockets of growth for GS since many of its larger rivals have suffered and are scaling back.
During 2004-2008, the share of asset management division in GS revenues has gone up from 18.4% to 35.9%. During the same time, the company's asset management division recorded a CAGR of 20%. GS knows it too well that for the next few years asset management division would be its growth engine. I am more than certain that GS would experience above industry average growth in asset management industry for the next few years to come.
