Big banks are sounding and acting a lot more like private equity.
The latest example came last week as Goldman Sachs (GS), one of the oldest and best known investment banks on Wall Street, repeatedly made clear with actions and words that private markets stand to play a critical role in its future growth — and even how top executives are compensated.
The pay component came Friday as Goldman handed CEO David Solomon a retention package of $80 million to stay five more years and an $8 million raise for performance in 2024.
Some of that raise came from a decision by Goldman’s board to introduce an executive retention tool long used by private equity giants: carried interest. Solomon and other executives now can get a piece of the carried interest earned on private funds within Goldman’s asset and wealth management division.
The board did so after considering “the unique competitive threats for talent that Goldman Sachs faces, including from alternative management firms and others beyond the traditional banking sector,” the firm said in a filing.
Goldman Sachs chairman and CEO David Solomon, in 2023. REUTERS/Brendan McDermid ·REUTERS / Reuters
Another reminder of the importance of private markets at Goldman came last Monday when it announced it had combined three groups into one “capital solutions group” that will look to take advantage of the recent surge across Wall Street in so-called private credit, a reference to debt that is not issued or traded publicly.
Private credit is a loosely defined market that includes a variety of exotic lending activities. It has mushroomed over the past decade due in large part to higher interest rates and regulation that forced banks to retrench from their own leveraged lending. Private equity firms have stepped in to fill that gap by making loans directly to companies, thereby competing with big banks.
Solomon said during an analyst call Wednesday that Goldman’s new combined group positions it “to operate at the fulcrum of one of the most important structural trends taking place in finance, the emergence and growth of private credit and other asset classes that can be privately deployed.”
Goldman’s approach follows a series of alliances struck last year between traditional banks and alternative asset managers also angling for bigger stakes in the $1.7 trillion private credit market.
One prominent private-equity boss, Apollo Global Management Inc. Chief Executive Officer Marc Rowan, has argued that public and private markets are converging. Both private and public assets carry risks and rewards, he told Yahoo Finance last November, with more companies opting to go private than public.
“The biggest trend in our industry is investors, individual investors, and institutional investors looking at their fixed income bucket and saying to themselves, why is this 100% public?” he said in November. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
Solomon, Goldman’s boss, sounded a lot like Rowan this past week — especially when he spoke to an audience of startup founders and entrepreneurs last Wednesday, following the release of the firm’s fourth-quarter earnings.
The CEO of Apollo Global Management Marc Rowan, and Goldman Sachs CEO David Solomon, third from right and second from right, pose next to each other at the Global Hong Kong Global Financial Leaders Investment Summit in 2023. (Photo by Vernon Yuen/NurPhoto via Getty Images) ·NurPhoto via Getty Images
“The reasons to go public, when you really reach an incredible scale, are getting pushed out,” he told the audience of startup founders and entrepreneurs, according to a report in the Financial Times.
“If you are running a company that’s working and it’s growing, if you take it public, it will force you to change the way you run it and you really should do that with great caution,” he added.
The comments were notable because Goldman remains one of the world’s largest IPO book runners. Last year, its equity capital markets business earned over $5 billion from helping clients go public.
Goldman also has a sizable asset and wealth management division where it handles $145 billion in private alternative assets.
That whole division pulled in twice as much in fees as the IPO business and for years Goldman executives have said that growing that business is their firm’s best chance at earning steadier returns.
What’s more, the number of companies choosing to go private in the US has been shrinking in recent years, despite some new signs of life in 2024.
Everything from higher reporting requirements and litigation costs to more public scrutiny and non-stop quarterly earnings have cited in the debate as reasons why companies might choose to stay private longer.
“It’s not fun being a public company,” Solomon said at the Wednesday event. “Who would want to be a public company?”
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.
