Rising stock markets have been kind to Goldman Sachs Group Inc.
Gains from investing in other companies rose 51 percent in the third quarter to the highest in almost four years as share indexes touched records. The bank credited its private-equity holdings for much of the increase.
Goldman Sachs is one of the few Wall Street firms still taking large stakes in other companies, continuing to deploy a merchant-banking model that dates back decades. While revenue from trading equities, fixed-income and commodities slipped from a year earlier, the firm’s smaller unit that makes private-equity style investments in companies and debt -- known as investing and lending -- topped every analyst’s estimate in a Bloomberg survey.
“It appears as if Goldman Sachs is morphing into more of a private-equity firm, rather than a trading house, despite the fact that this transformation appears to be more inadvertent than part of a deliberate strategy,” Octavio Marenzi, chief executive officer of capital-markets management consultancy Opimas, said in an email.
The bank’s shares climbed 1.4 percent to $245.75 at 9:02 a.m. in early trading in New York.
Goldman Sachs last month laid out a series of initiatives to boost revenue by $5 billion even if the trading environment doesn’t improve. For now, it’s leaning on gains from principal investments that have been a hallmark of CEO Lloyd Blankfein’s tenure to keep its return on equity above most rivals. Annualized returns reached 10.9 percent for the third quarter.
Goldman Sachs created the investing and lending segment in 2011, saying at the time that it was an effort to give greater transparency to analysts and investors. Since then, the unit has acquired a reputation of being one of the hardest to model, making it difficult for analysts to accurately predict its results. As a result, investors are often reluctant to assign it the same weight as other business units.
The bank had to change its strategy with the 2015 implementation of the Volcker Rule, which limits how much money can be invested in private-equity type funds. The firm has moved slowly to exit those investments, asking for and receiving a series of exemptions that push compliance out to 2022. It also started making more direct investments.
The investing and lending unit’s activities will take on greater importance in coming years as Goldman Sachs looks to loans as a key focus of growth. The $5 billion revenue plan assumes that more than 40 percent of the total will come from financing and other loans.
The segment was “far and away the biggest driver of the quarter’s revenue upside,” Credit Suisse Group AG’s Susan Katzke wrote in a note to investors.