Goldman Sachs Rode the SPAC Wave in the First Quarter

(Bloomberg Opinion) -- The SPAC boom couldn’t have come at a better time for Goldman Sachs Group Inc.

The Wall Street institution faced a slew of undesired attention during the first three months of 2021. Several senior leaders left the firm, including Omer Ismail, who led the Marcus consumer-banking division that Chief Executive Officer David Solomon has made a priority in the bank’s strategic shift. A presentation from some first-year analysts in Goldman’s investment-banking group complained about 100-hour workweeks and declining physical and mental health, creating something of a firestorm on Wall Street and forcing Solomon to make concessions, such as better protecting junior bankers’ Saturdays. Less than a week later, Goldman found itself snared in the blowup of Bill Hwang’s Archegos Capital Management. Even though Goldman ended up largely unscathed, it raised questions about the bank’s risk-management practices, as it did at financial institutions across the globe.

So, yes, it was an especially good time for Goldman’s equity underwriting revenue to quadruple. Those fees surged in the first quarter to $1.57 billion amid a rush to market for special purpose acquisition companies and initial public offerings from technology companies. The nonstop activity, along with its traders bringing in a best-in-a-decade $7.58 billion, pushed Goldman’s overall revenue and earnings to a record. Its 31% annualized return on equity is the highest since 2009.

It’s hard to overstate the surge in SPACs. According to data compiled by Bloomberg Intelligence’s Alison Williams, the IPO volume of SPACs reached almost $100 billion during the first quarter, blowing away the previous high of $40 billion in the final three months of 2020. In the first quarter last year, volume was just $4 billion. Goldman ranks third overall in SPAC market share, trailing only Citigroup Inc. and Credit Suisse Group AG.

Yet there’s also no shortage of naysayers who see the more recent slowdown in SPAC deals as a sign that things moved too quickly. My Bloomberg Opinion colleague Chris Bryant argued last week that Microsoft Corp. founder Bill Gates is right to worry that companies are going public too soon. Unlike in traditional IPOs, businesses that go public through blank-check companies can rely on optimistic projections to make their case rather than historical financial information. That worked well when bond yields were near record lows and investors would pay a premium for growth. After benchmark 10-year Treasury yields jumped by more than 80 basis points last quarter, that calculus has changed; companies that can make money now are in favor. 

In the grand scheme of the Goldman empire, SPACs won’t make or break the bank. Solomon pointed out that SPACs made up only a single-digit percentage of Goldman’s M&A activity in the first quarter. Rather, he described the pickup as “rooted in much more broad strategic activity.” Still, a 315% jump in equity underwriting speaks for itself — whether SPACs or not, the conditions were ideal for dealmakers to do their thing. Chief Financial Officer Stephen Scherr emphasized that Goldman’s investment-banking backlog is at a record high, in part because blank-check companies are looking for targets. 

Much like three months ago, Goldman is hedging its bets about replicating performance that relies largely on market sentiment. “The first quarter was an extraordinary quarter,” Solomon said about trading during an analyst Q&A. “I don’t think that the expectation should be that activity will continue at that pace through the second quarter, third quarter and fourth quarter.”

As for those negative headlines, Solomon sought to assuage analysts. “We’ve always been a developer of strong talent,” he said. “There’s nothing about any of the attrition this year that looks extraordinary.” He said he’s been “passionate” about junior employees throughout his career, adding that “I fully appreciate how busy our people have been.” The bank has set aside more than $6 billion for compensation and benefits, in what could be a sign it’s looking to keep its ranks satisfied with bigger payouts. Scherr said Goldman is “very aware of the embedded risk” in its efforts to grow its prime business in a nod to the Archegos collapse. Solomon said that while such events can happen and probably will again, he viewed it mostly as a one-off event. 

Whether or not the SPAC boom turns out to be a one-off surge or a more permanent fixture in markets, it certainly helped shift the narrative for Goldman’s first quarter. As of 11:20 a.m. in New York, shares were up 4.7%, on pace for the biggest daily advance in more than three months, back when Ismail was still running Marcus and only a select few on Wall Street had heard of Archegos. Through it all, Goldman proved it was still Goldman — as profitable as ever.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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