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Asset managers are now ascendant on Wall Street. The reaction of some of the displaced big banks: rearrange the org chart.
Goldman Sachs is one. On Tuesday it promoted a group of hotshots to important roles in its investment banking and trading business. Last week it created a “capital solutions” group — where bankers covering private equity and debt underwriting collaborate with its massive wealth and asset management group, connecting parties with investable assets to those who need financing.
Such machinations are the reaction to a big upset. But the biggest asset managers in the world — BlackRock, Blackstone, Brookfield, Apollo as well as sovereign wealth funds — have increasingly been able to supply companies with money directly, challenging banks in their role as gatekeeping toll collectors.
That has left the banks scrambling to figure out ways to maintain their fee schedules and their relevance. Several banks have decided to form partnerships with private capital firms, offering their existing client relationships as a form of lead generation for asset managers looking to deploy capital as debt or equity. A tie-up between Citigroup and Apollo is the most prominent example.
Goldman, as a bank that is in many ways not much like a bank, is perhaps best placed for this new world. As well as being the dominant Wall Street provider of M&A advice and corporate finance underwriting, it also has a separate massive wealth and asset management business overseeing $3.2tn in assets. Its performance is going to be particularly close to management’s hearts: Goldman’s top two executives, CEO David Solomon and his deputy John Waldron, are now getting paid in part through carried interest profit generated by Goldman’s alternative asset funds.
Joined-up thinking may not come easily to firms like Goldman. They must overcome sprawling bureaucracy and manage the inherent conflicts that come with simultaneously investing, advising and trading.
The prize of a better hearing from investors makes it worthwhile, though. Solomon’s firm trades, for now, at a steep valuation discount to Blackstone, Apollo and their peers.
Asset managers have been quickly gaining ground. They have even created their own in-house mini-investment banks complete with dealmakers to pitch deals to companies, and then slice, dice and sell the debt they originate. The big firms like Apollo and KKR are already generating hundreds of millions of dollars a year in such transaction fee revenues.
Banks will always have the advantage of being able to raise capital more cheaply than asset managers, by virtue of their customer deposits. Yet their clunky, siloed structures have left them vulnerable to disrupters. Goldman is right to be thinking more creatively about how its bankers can collaborate. As private markets deepen, expect other Wall Street org charts to similarly morph.
