Goldman Sachs Is Finally Doing Some M&A for Itself
(Bloomberg Opinion) -- It’s hardly the kind of transformational deal Goldman Sachs Group Inc. likes to engineer for its corporate clients. But the investment bank’s 1.6 billion-euro ($1.9 billion) agreement to buy the asset management arm of insurer NN Group NV is a reminder of Wall Street’s claim to be better than the insurance industry at generating investment returns. With both sides agreeing, expect similar transactions to follow.
The U.S. investment banks are keen to reduce the volatility of their financial results, an inevitable problem of being in a business driven by capital markets and M&A activity. Expanding in asset management is the natural way forward. Sure, revenue here is also subject to market whims, but it’s relatively stable compared with bond trading and corporate finance.
Meanwhile, the insurance sector is a willing seller of its in-house fund management operations. The industry appears to have accepted it shouldn’t be in this business. The job can be outsourced to dedicated asset managers who have greater scale, expertise and efficiency. Just consider the recent separation of M&G Plc from insurer Prudential Plc. In this case, NN happens to be under pressure from activist Elliott Management Corp. Exiting asset management wasn’t Elliott’s key demand, but the pressure to simplify and focus is near universal in insurance.
These trends collide in the Goldman-NN deal. Chief Executive Officer David Solomon emphasized asset management as a growth engine in last year’s strategy update. The transaction lifts the firm’s global managed assets by more than 10% and roughly doubles its European funds business. At less than 1% of assets under management, the price is hardly racy, especially after considering Goldman’s ability to cut costs by consolidating shared functions.
The cherry on top is a 10-year contract to manage assets for NN itself. If fund management is more stable than investment banking, running assets for an insurer is even better. The value here may not be so much in the quantum of the portfolios taken on, but in the stickiness attached to them. In turn, the deal reinforces Goldman Sachs Asset Management’s status as a key adviser to insurers and pension funds managing their liabilities. Adding heft in environmental, social and governance investing, and obtaining a platform for potential expansion in retail asset management, are further bonuses.
Goldman trades at a respectable 50% premium to its so-called tangible book value. But that’s still a discount to rivals including JPMorgan Chase & Co. and Morgan Stanley. It’s no coincidence that Morgan Stanley has been pushing into asset management through acquisition and JPMorgan has signaled an appetite to do the same. This deal may help narrow the valuation gap a little. Contrast this approach with the European investment banks that have been largely selling out of the funds business, and which trade at much lower valuation multiples.
This won’t be the last transaction of its kind. Asset management is diverging between highly efficient scale behemoths and smaller, niche players. No one really wants to be in the middle — and that’s where many insurers’ in-house operations sit. Bear in mind that insurers also take a lot of external advice on asset allocation.
It’s also worth asking where the core business of a standalone insurer is headed. Alternative asset manager Apollo Global Management Inc. runs assets for insurer Athene Holding Ltd. Earlier this year, the duo agreed to merge, in large part to eliminate the potential conflicts of interest in the existing arrangement.
As for the investment banks, asset management acquisitions like this, which come with long-term contracts attached, will be highly sought after. Of course, the big independent asset-management firms have a voracious appetite for scale too. If insurers are quitting the contest to demonstrate who’s best at running money, it’s still a tough competition between the private-equity firms, the asset managers and the Goldmans of this world.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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