Offering a big strategic vision isn't for those without conviction.
Last month, Goldman Sachs CEO David Solomon announced plans to merge five investing teams into a single alternative investing unit and pivot from a strategy of investing its own money to one investing on behalf of pensions and sovereign wealth funds. The move was hailed by some as a smart way to bring a collection of disparate teams under one roof.
But the strategy has been beset by doubts and internal rivalries, according to seven people with knowledge of the discussions or who have been briefed on the months-long debate. That's left some execs jockeying for control.
Beyond mere gossip, the friction raises the stakes in tangible ways. To make a mistake could mean hobbling two teams – the merchant bank and special situations group – that are among Goldman's most successful. Talented execs might leave or employees may be distracted. Already, Daniel Oneglia has left as head of one Goldman special situations unit for a job at Blackstone, just one year after becoming partner, according to a memo.
Outside investors don't like to see turnover when they consider giving money to a manager. Their expectation is the individuals responsible for the returns will continue making investment decisions after clients have given their money.
Failing could also mean missing out on a rare growth opportunity – one where Goldman has both a commanding presence and a growth trend at its back. Total private market assets under management have grown 50% in the last five years to $6 trillion, Goldman President John Waldron said at a May conference, explaining why the management team has made this one pillar of an ambitious growth plan.
"The strategy of aligning our investing businesses is sound and will prove so over time," Solomon said in a statement provided by a spokeswoman. "No change occurs without some noise, but the team is already working well together and interest from clients is very strong."
At its core, the debate centers around two of Goldman's most profitable units. The merchant bank, a private equity and private credit empire built by Rich Friedman, Goldman's longest serving partner, that rivals the likes of Blackstone and KKR. And the special situations group, a secretive group within Goldman's sales and trading division run by Julian Salisbury.
Friedman has resisted the plan. At 61, Friedman is nearing retirement age and concerned the plan could somehow harm the businesses, according to three people familiar with his thinking. He questioned why it was necessary to disrupt the status quo by taking what some may consider unneeded risk, one of the people said.
Friedman is also cognizant about his legacy, two of the people said. Since taking the helm in 1991, he's cultivated a tight-knit group, largely free of the politics that have befallen other Goldman divisions. The special situations group in Goldman's securities division enjoys a reputation for having more of a cutthroat culture.
Friedman's style has been criticized in the past for failing to give his senior lieutenants greater visibility within the bank. Nonetheless, he has made it clear that his hand-picked proteges — Sumit Rajpal and Andrew Wolff — should have a hand in running the division, according to four of the people. Rajpal, who has focused on financial services investments in the past, spearheaded an investment in TransUnion that brought a $2.8 billion windfall.
Friedman declined to comment for this story.
But Solomon and Waldron have pushed their own plans, according to people familiar with their thinking. The CEO wants to take advantage of the growth in alternatives, but to do so means moving away from the limitations of Goldman's balance sheet. He believes the best way to do that is to combine teams that had operated independently in order to present a unified face to clients, one of the people said.
Solomon is said to value Salisbury's advice on broader issues of investing and securities markets, and the special situations chief agrees with the CEO's assessment about how to go after growth, one of the people said. The special situations chief was one of six signatories on a May 2018 memo announcing the departure of securities division co-heads Pablo Salame and Isabelle Ealet, putting him in consideration to run that division. But some in the merchant bank haven't ever met him.
One potential scenario would have seen Salisbury run the new alternatives division alone, one of the people said. Another said the plan was always to have the leaders of the merchant bank — increasingly Rajpal and Wolff as Friedman began to step back — join with Salisbury, the special situations head.
Friedman has signed off on that leadership structure, and begun introducing the three during at least one town-hall style event.
"Julian is very good, very well thought of," one of the people said. "He's done a good job running that book."
The strategic discussions took place among a small handful of execs, including Solomon, Waldron, Friedman, CFO Stephen Scherr, and Salisbury, one of the people said.
For years, the special situations group, the merchant bank and other pockets of capital inside Goldman have competed directly for deals, or invested in the same sector without sharing ideas. The teams often aren't aware of what each other is doing, according to insiders, which conflicts with Solomon's "One Goldman Sachs" approach. The idea is that the new setup will remedy that.
Not all employees are on board. Execs who are used to operating independently are now being asked to collaborate or share leadership of something they used to run alone. Amidst the discussions, some partners and managing directors have begun to worry about the role they may have in the combined unit, the people said.
The first outward sign of the changes emerged April 18, when the bank sent a memo to employees announcing Friedman's move to chairman and a hand off of day-to-day responsibilities and management to Rajpal and Wolff. Salisbury was also named in the memo, adding responsibility for the firmwide real estate investing activities.
More details emerged two months later when a second memo announced Salisbury, Rajpal and Wolff as the three co-heads of a newly combined alternatives-investing unit. While it looked like an equitable sharing of responsibilities, some insiders saw Salisbury as the frontrunner by virtue of his place on Goldman's powerful management committee.
That has led to fears among some execs that it's only a matter of time until he consolidates power, some of the people said. If he does, Rajpal, Wolff and others may leave, two of the people said. Mike Koester, who leads capital raising activities for the merchant bank, is another senior exec who will be crucial to the firm's growth plans and may want a more senior role, another said.
"David is the new CEO and he's got to make changes," one of the people said. "But to go and place someone else from a different division in there you have to ask why. Is there something wrong with it? I don't think so. So that's not setting things up very well."
There's also the matter of how Goldman will replace the money it's made in the past from balance sheet investments. The Transunion investment is one example, where the firm made $2.8 billion. While a like-for-like comparison is difficult because of where those profits were made (on balance sheet vs a fund), the firm would have to raise $140 billion in outside money and collect a 2% management fee to equal that haul.
But when things go bad, like they did for the firm's real estate investments around the financial crisis, investments get marked down. That makes it more attractive to have a steady stream of management fees. Many economists expect the economic recovery to run out of legs in the coming years.
And investors and Wall Street analysts appreciate the predictability that comes from recurring fees.
"The business needs to have more fee income, more durability, but it also needs to be a very big scale player," Waldron said at the May conference, warning eager investors that it will take time. "We're not going to turn this battleship from balance sheet investing to fee income overnight."
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