Limited Impact to Goldman Sachs Stock in Potential PE Spinoff
Goldman Sachs (NYSE:GS) is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. It competes with Morgan Stanley (NYSE:MS), JP Morgan (NYSE:JPM), Credit Suisse (NYSE:CS), and UBS (NYSE:UBS).
Our price estimate for Goldman Sachs’ stock is $167, roughly in line with market price.
Goldman Sachs’ Asset Management division constitutes around 10% of the $167 Trefis price estimate for the company’s stock. The Asset Management division includes the company’s Private Equity/Alternative Investment funds, with total assets under management (AUM) standing at roughly $871 billion as of 2009.
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Goldman Could Spin Off Private Equity Operations
Goldman Sachs has been considering a spin off of its private equity operations, possibly to comply with the Volcker Rule, which may come into affect in a few years. The Volcker Rule, which was part of the Dodd-Frank law passed this year, would force banks to limit their holdings of certain alternative assets to 3% of their Tier 1 capital. [1]
Goldman Sachs could decide to spin off its private equity arm or even launch an initial public offering. However, according to Reuters, Goldman executives are not planning any immediate action, as they will have between five and seven years to reach a decision. [2]
Impact on Assets Under Management
Currently, we estimate the total AUM for Goldman’s Asset Management division will increase from $871 billion in 2009 to over $1 trillion by 2017. However, if Goldman was to do away with its private equity business, we estimate that there could be a 15-20% downside to this forecast. As a result, the AUM for this division could fall to around $800 billion by 2017. This would result in around 3% downside to our $167 price estimate for Goldman Sachs’ stock. Also, the relative contribution of Goldman’s Asset Management division to total company value (currently 10%) could fall by up to 2%.
The limited impact of this result is due to the relatively small contribution that Goldman’s Asset Management division provides to company value. We estimate that 10% of Goldman Sachs’ stock value is derived from its Asset Management operations. Comparatively, the company generates an estimated 37% of its value from bonds/currencies/commodities, 18% from security services and other investments, and 17% from equity trading.
Drag the trend-line in the chart below to see the impact of various AUM scenarios for Goldman Sachs’ Asset Management division on the company’s stock value.
See our full analysis for Goldman Sachs here
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