Can this man reverse Goldman Sachs’ falling profits?

Goldman posted its eighth straight quarter with a profit drop – down 33 per cent – as it gets further away from the pandemic boom that helped its traders and dealmakers set records. And as that fades, investors have been refusing to value the company as highly as its more diversified rivals. A key metric – comparing the firm’s stock to the value of its assets – is stubbornly trading below where it was when Solomon took over.

The answer to that is an identity shift for the division that Nachmann, 53, was handed last October. Solomon has vowed to break Goldman’s love affair with its merchant bank and turn it into an asset-gatherer. For Nachmann, that means winding down bets made with the firm’s own funds, while ramping up the money it attracts from clients.

The Goldman lifer leads a sprawling 13,000-person division that woos ultra-rich individuals and deep-pocketed institutions. It features a business resembling modern-day private equity giants, where clients span US pension systems for teachers to sovereign wealth funds with oil-fuelled war chests. The other segment helps the world’s wealthiest grow their fortunes.

Only recently – in what almost sounds like homework – he finished bingeing The Gilded Age, HBO’s period drama depicting an endless struggle for dominance in New York’s wealthiest realms.

His mission is to give Goldman what its crosstown rivals in New York already boast: a giant business that reliably cushions the swings of Wall Street operations. JPMorgan Chase & Co has long had Chase, the retail bank. Morgan Stanley found ballast with the Smith Barney brokerage. Both have been embraced by shareholders heaping a much higher multiple on their stocks.

For years, Goldman’s answer to one volatile business was another volatile business. Leaders showcased its track record wagering house money – or making principal bets, in banking parlance – with the occasional losses offset by frequent windfalls.

But shareholders discounted the business for its bumpiness. They wanted something predictable, and Solomon moved to give it to them. The new strategy should free up capital and generate steady management fees – even if it translates into lower revenue.

“Do you want to be in the client business or do you want to be in the principal business?” Nachmann said. “It certainly seems right now that investors prefer predictability and consistency over volatility.”

The pivot isn’t without risk, mainly because Goldman was really good at investing its own capital. Some in the building saw it as the firm’s secret sauce. In the five years before Solomon took over, its portfolio of balance-sheet investments delivered more profit than any other part of the bank – more than the trading floor, more than investment bankers.

Now, Goldman has to prove it can compensate for that by amassing assets even as executives spell out a tougher fundraising environment ahead. That’s made the senior exits and the leadership musical chairs in the unit a topic of fervent discussion.

Leadership churn

After Nachmann was given charge of the rejiggered asset and wealth division last year, a senior executive inadvertently captured the mood in a town hall. He kept referring to the unit’s new head as “Gregg Nachmann” – perhaps confusing the new boss with a prominent former Goldman executive.

When the speaker was corrected, he quipped: why bother remembering names of the bosses when they keep changing so often.

The serious concern is that the churn could derail fundraising, giving existing clients pause and dissuading new ones. Nachmann himself has fielded concerned queries from investors and even consultants who advise institutions.

Some of the management change was inevitable because of the way the business was reorganised, he said. “You’ve got a bunch of people who are used to doing balance-sheet investments in a fashion that we’re not doing any more,” Nachmann said.

“The key thing in my mind is who is investing the money. Those are the people that really matter to the investors.”

Nachmann, who arrived at the firm in 1994, has snagged the rare distinction of having run all of its major divisions – something no other current executive there has done.

And this isn’t the first time he’s wrestled with a project that could be consequential for the firm’s stock. Not long after joining, he was one of the junior bankers in a group that studied whether Goldman should even go public.

The Wall Street giant was one of the last major financial institutions to do so. Next year will mark its 25th year as a public company.

Improbable guests

Every year, Goldman rounds up its management committee and whisks its members away from the din of its offices to meditate on ways to make more money for the firm. They often invite special, and sometimes improbable, guests – like last year, when Ukraine President Volodymyr Zelensky beamed in to their gathering in the coastal enclave of Nantucket.

Last month it was Mayo, fresh off a podium finish at the powerlifting nationals, rattling off numbers on what’s weighing down Goldman’s stock. Earnings volatility is a big irritant, he said. And the firm’s principal bets were among the causes.

The swing in results isn’t the only problem. Banks are required to set aside a lot more capital when they risk their own money.

The practice lowers return on equity, a key measure of profitability. Analysts estimate Goldman’s return on equity in the quarter that just ended was less than half the 18 per cent reported by JPMorgan on Friday.

Winding down Goldman’s $US64 billion pile of balance-sheet wagers by almost 80 per cent has been one of Solomon’s priorities.

Nachmann said the firm is on track to exit a majority of its historical investments ahead of its year-end 2024 target. A fundraising juggernaut was meant to fill that void. Goldman had said it would be able to raise $US225 billion for alternative investments by next year, another target it’s poised to meet in the coming months.

“Capital-light is the opportunity to really increase the multiple,” Nachmann said. “Most people would think that business trades at a materially higher multiple.”

Banking Beyoncé

As Goldman moves away from merchant banking, Nachmann is doubling down on its business of catering to people who on average have $US60 million at the firm.

The wealth business has clocked a 9 per cent growth rate over the past decade. Nachmann sees even more in places like Europe and Asia.

“You can grow at a faster pace because you’re starting with a lower base, and you can easily double the business there and then double it again,” he said.

Lending to the wealthy has been one of the most profitable efforts – whether that means financing Jay-Z and Beyoncé’s mansion in California’s Bel Air, or lending money to artist Jeff Koons, known for his whimsical Balloon Dog sculptures. It also attracts Wall Street magnates looking to borrow against their illiquid investments.

One staid part of Nachmann’s fief is the unit that peddles mutual funds and exchange-traded funds holding stocks and bonds, and runs portfolios for pension systems and insurers. The fees tied to that business tend to be less than what can be earned in alternative investments. But they still offer a reliable pool of income at scale.

Nachmann said running such portfolios for corporate pension plans and other big investors could be particularly attractive.

The practice of tapping a third party is known as an outsourced chief investment officer. In September, Goldman snagged a $US29 billion mandate to handle the investments for BAE Systems – the largest so-called OCIO mandate in Europe, according to Nachmann.

He has also been quick to ditch segments he doesn’t like. He jettisoned the consumer-lending business even before he formally took charge, and last quarter unwound a nascent effort to chase the mass-affluent market.

“You have to make decisions,” he said. “Most people at least tell me that even if they don’t agree with a decision, they’re happy that we make a decision because we’ve got to move on, we’ve got to get to the next day.”

Bloomberg Wealth