David Solomon has spoken. Last week, the CEO in waiting at Goldman Sachs made his first presentation to investors at the Bernstein Strategic Decisions Conference.
There, Solomon outlined his ideas for Goldman's future. They were mostly a continuation of the strategy presented last September by Harvey Schwarz, the CEO candidate Solomon defeated. They were also similar to the strategy referenced by still-current CEO Lloyd Blankfein in his recent shareholder letter.
However, there was some unique Solomon spin in the presentation too. As Goldman hires-in record numbers of executive directors and VPs in its pursuit of $5bn in additional revenues, the intentions of its CEO-incumbent are worth dissecting in detail. - Especially as Solomon said the extra $5bn is "far from" Goldman's only ambition and alongside the Marcus consumer lending platform, Goldman wants to "broaden [its] core business", "expand [the] franchise," and "enhance" the "growth and the diversity of our revenue stream."
Here's how Solomon said this will happen.
Solomon is all about investment banking
As is to expected from someone who rose up through the ranks in Goldman's investment banking division (IBD), Solomon is big on investment banking. Schwartz's plan said Goldman should get an extra $0.5bn+ from IBD. Solomon didn't contradict this; he did point to historically high growth rates which seem to suggest the opportunity could be larger still.
Since 2012, Goldman's IBD revenues have risen 50%, said Solomon. He added that Goldman's investment banking pipeline is currently at a record high (whereas activity in the sales and trading business declined in the second quarter of 2018). In pursuit of the $500m of extra IBD revenues Solomon said Goldman launched an initiative to add 1,000 investment banking clients two thirds of them in America. He added that the firm has made "20 senior lateral banking hires" in the past year to help achieve this, and that 60% of the new clients have been covered already.
Goldman said last November that it wants to expand its penetration of mid-market corporates in the U.S.. Solomon reiterated the firm's intention of connecting with corporate clients and noted that two thirds of the firm's on Goldman's list are backed by private equity investors.
Solomon is all about the synergies between investment banking, debt capital markets and private capital
While IBD as a whole has grown at Goldman, the debt capital markets (DCM) debt underwriting franchise has been a star performer. And the alternative capital solutions group, which raises private capital for clients, has been the starriest performer of the lot.
Solomon noted that Goldman went for growth in DCM in 2012 and has since upped its revenue share in that business by almost 50%. He noted that this in turn has fed through to Goldman's strength in M&A, as the firm has been able to use its DCM franchise to help fund clients' M&A deals.
At the same time, Solomon noted that Goldman successfully built an "alternative capital solutions group" over the past 18 months, and that this has enabled the bank to raise private capital for clients in an environment where the market for initial public offerings (IPOs) has been constrained. Debt interest income from Goldman's investing and lending division has risen three times since 2012. This too has helped fund M&A deals.
Solomon didn't exactly say so, but the implication is that investing and lending and DCM bankers will be at the front of his shopping list (along with corporate coverage professionals).
Solomon is all about technology to improve client experience
Financial News reports today that Goldman has been hiring “aggressively” in London and Warsaw for its Marquee team, which is building technology that will allow clients to access Goldman's SecDB pricing and risk database directly. The new recruits include technologists and strats.
SecDB is the baby of Goldman CFO Marty Chavez rather than Solomon. But Solomon is supportive. "We continue to invest in technology platforms that allow us to better serve our clients' needs and improve the strength of our position in those businesses," he said.
Solomon is all about flow rather than structured products
When top junior traders left Goldman Sachs earlier this year, they complained to us that they were leaving because Goldman was shifting away from complex structured products towards more of a flow trading mentality, and that "flow people" are therefore ascendant.
Solomon confirmed last week that this is entirely intentional. "Our business historically fixed incomes have been focused around the bespoke structured solutions and derivative transactions," he said, adding that Goldman is moving in favour of, "cash business, flow business and electronic platforms." In fixed income currencies and commodities (FICC), flow trades accounted for 68% of the total at GS last year - up from 55% in 2007. Cash trades accounted for 51% of the total, up from 35% in 2007.
Solomon is all about systematic trading and electronic platforms
In line with Blankfein and Chavez and just about every other bank on the street, Solomon is pushing systematic trading. He pointed to Goldman's new bond pricing engine and algorithmic corporate bond trading facility, which he said can now make quotes for 10,000 securities (up from 7,000 last summer) on lot sizes of up to $2m. In fixed income, he said electronic trades accounted for 13% of the total last year, up from 3% in 2007.
Solomon intends to expand in corporate equity derivatives
As Goldman goes for an extra $500m of revenues from equities, Solomon said the firm is particularly pursuing revenues in corporate derivatives. It currently ranks fourth in this market, and therefore has an opportunity to grow. Solmon added that Europe and Asia are seen as having particular potential - which helps explain Goldman's recent big equity derivatives sales hires in London and Paris.
Solomon suggests there will be more new leaders in securities
Lastly, Solomon suggested that the recent exits of Pablo Salame and Isabelle Ealet which left Ashok Varadhan as the sole head of Goldman's securities business, were not the end of the matter.
Even before Salame and Ealet left, Solomon said Goldman was in a "transition" in terms of the heads of its securities business, with seven people in leadership positions. The exits of Salame and Ealet mean that some of Goldman's "younger leaders" are now being 'transitioned up,' said Solomon.
The younger leaders Solomon referred to would seem to be the five executives who signed the memo announcing Salame and Ealet's retirement alongside Varadhan. These were: Paul Russo, Michael Daffey, Justin Gmelich, Jim Esposito and Julian Salisbury.
The implication is that Varadhan will not remain sole head of the securities business and that one or more will be promoted alongside him. The race is on.
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