As Goldman Chases Smaller Clients, Some Doubts and Early Wins

(Bloomberg) -- Watch out for the friendly, neighborhood Goldman banker.

Fresh off a quarter in which Goldman Sachs Group Inc. raked in more fees from dealmaking than any rival, a new slate of managers say they’re looking to expand that lead by ratcheting up a campaign to deepen ties with companies valued at less than $2 billion. Executives talked up the effort on a conference call last month, indicating they will dedicate more bankers to it. They’re also getting ready to roll out more products.

Goldman bankers began fanning out across the U.S. two years ago to pitch companies once deemed too small to warrant regular attention. They’re now setting up a dedicated team. It’s a dramatic cultural shift for a firm whose elite bankers long prided themselves on chasing the most lucrative deals. Now, they just have to overcome all of the skepticism.

“I was intrigued to understand why they were reaching out,” Chris Fraser, the former head of a Texas-based chemicals company said of an unsolicited email from a Goldman banker a couple of years ago, as its push began. “I even asked the question, ‘Don’t you have more important or bigger potential clients to spend time with?”’

Fraser eventually struck up a dialogue and hired the bank for a secondary stock offering in 2017 for his company, KMG Chemicals Inc. The clincher, he said, was a banker on the ground.

“It wasn’t someone flying in from New York, filling up their calendar for the week and flying out,” he said. KMG later agreed to sell itself to a competitor, which had also hired Goldman Sachs.

Growth Hunt

It’s not like Goldman has never dealt with smaller companies, but the push to nurture them as a significant source of revenue has gotten more serious in recent years and urgent in recent months.

Veteran investment banker David Solomon took over as chief executive officer in October, shuffling senior managers. His team is contending with a weakened environment for trading, which has hit Goldman especially hard -- the firm’s four best years in terms of revenue all came before 2011.

That’s led to a fresh and deliberate effort to consider new types of clients and develop ways to meet their needs. Executives may tout such initiatives Thursday when hosting the first annual shareholder meeting of Solomon’s tenure.

“There is a focus on trying to find growth,” Gregg Lemkau, one of Goldman’s three heads of investment banking, said in a interview. “Two ways to grow are more clients and more products.”

Goldman Sachs doesn’t break out deal-advisory revenue from the middle-market push, which instead contributes to other business lines -- which will become the figures to watch. Its bankers have set out to sign up smaller companies for foreign-exchange transactions, interest-rate hedging and commodities services. Soon, they will dial through client lists to pitch a cash-management system to be rolled out next year.

“It’s one more arrow in the quiver of the folks we are going to be sending out,” Lemkau said.

Product Push

That foray may prove lucrative if the system lives up to the bank’s internal expectations. Chief Financial Officer Stephen Scherr told analysts on a conference call last month that the cash-management tool may help the bank shave as much as $100 million from its own expenses. But the benefit to the company might multiply if customers enroll, too. Again, wooing them rests with the investment-banking division.

The firm already has hired more than three dozen bankers in the past few years for the middle-market push, and plans to dedicate about 100 bankers over time, Scherr said. Will Bousquette, a partner and 20-year company veteran, is leading the effort.

“For Goldman this is a bit more of a novelty than for JPMorgan or Bank of America,” said Ana Arsov, who covers global investment banks at Moody’s Investors Service. Goldman Sachs has long been considered “a premium player,” she said, but “it’s logical to say, ‘Is there a wallet out there that we simply have not penetrated that we could?”’

Overlooking the full potential of small- and mid-size companies came at a cost in recent decades. Banks that built relationships in that space had an edge in subsequent dealings with so-called financial sponsors, such as private equity firms, as they became more active in buying and selling the ventures in that corner of the market. Their vast pools of capital also need services that Wall Street firms offer.

To pry away market share from well established competitors, Goldman Sachs must prove to small companies it’s an ally, not an opportunist.

“We had some of the concerns,” said Colin Day, founder and CEO of software company iCIMS Inc., which he called “too small to be on their relationship radar.”

Yet Goldman Sachs ultimately worked its way into a deal, serving as iCIMS’s exclusive financial adviser in the sale of a majority stake to Vista Equity Partners last year.

“There is a little bit of skepticism out there and it’s natural,” Lemkau said. “We are serious and committed. If at any moment a client doesn’t feel satisfied, they can call the head of investment banking directly and yell at me.”

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, David Scheer, Dan Reichl

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