What is the answer to the Goldman Sachs conundrum? The world’s most illustrious investment bank has recently been made to look, well, cheap by those upstart alternative investment managers.
With the likes of Fortress going public, and jumping to a nose-bleed worthy 30 times earnings, and Blackstone set to follow with a valuation that could reach $40bn or more, the coming out of the cream of the hedge fund and private equity world has crystallised their value - and put Goldman’s on around 10 times into rather harsh perspective.
Thorold Barker has a suggestion, writing over the weekend in the FT. Goldman, he points out, has $147bn of ‘alternative assets under management, compared to Blackstone’s $79bn - and asset management is only one part of the Goldman business.
There are of course various possible reasons for the discrepancy. Blackstone could be viewed as having better growth opportunities - or might have a better track record of investment returns from its funds, something Goldman does not reveal.
If Blackstone et al do achieve these hefty valuations, and crucially manage to sustain them for some time, Goldman might reasonably want some of that glow reflected onto its own business. So what to do? One option would be to spin off the alternatives business but the bank is unlikely to relish losing control of such a fast-growing and lucrative business. Another option, the sale of a partial stake, is a messy one.
So, says Barker, the easiest option would be for Goldman to take the boom in alternative asset management as a sign that it is time for more transparency. It could give more detail on exactly how it generates profits in its different businesses. Investors could then get more comfortable with the mechanics of the group and give a clearer view of what the sum of Goldman’s parts really is worth.
That idea has won whole-hearted support from one quarter. “Mr. Barker is absolutely right. And Goldman should heed his words if they know what is good for their employees’ pocketbooks - and those of their outside investors.,” says Roger Ehrenberg at Information Arbitrage. “This is clearly a case where something has to give - either Goldman is being valued at some 50% of its fair market value or Fortress (and, shortly, Blackstone) are grossly overvalued. In truth, the right answer probably lies somewhere in between.”
“Mr. Blankfein and the Goldman Board should strongly consider some enhanced transparency of its alternatives business in order to drive a sharp upward spike in valuation. I think this is a small price to pay for tens of billions of value creation. And the PR benefits of better, more complete disclosure wouldn’t hurt, either. And they’d be a trail blazer among the top tier of the investment banking community. The answer is clear. All that remains is to just do it.”
