The real estate principal investment business of one of Wall Street’s most famous investment banks has come under scrutiny due to high-profile departures in its asset management business and write-downs in its commercial real estate portfolio at the end of the second quarter.
The question in the market is if Goldman Sachs’ reboot of its real estate fundraising and asset management platform will stay on course. But speak to the senior executives steering the business and you will hear words of defiance, resolve, even confidence about seeing through a plan set in 2019. The plan will see the firm switch emphasis to outside capital from investing from the bank’s balance sheet capital – in line with other units at the bank.
Reacting to the focus on the bank’s departures, Jim Garman, now sole global head of real estate for Goldman Sachs Asset Management, the unit responsible for the bank’s real estate funds, said: “Clients come to Goldman Sachs for access to a team, not a single player. We have a very deep bench of top talent and are confident about our ability to march forward and execute our strategy.”
The departures include Takashi Murata, the former co-head of global real estate, who left this summer and Gaurav Seth, who was head of US real estate and left in February. Both are joining private equity firm Warburg Pincus. Their exits coincided with the exit of Julian Salisbury, GSAM’s chief investment officer, though he was not considered active in the day-to-day operations of the real estate business – despite multiple media appearances discussing the sector.
Jeff Fine, global head of real estate client solutions and capital markets, said the departure of Murata, who had been with the bank for 25 years, was a loss given his leadership in Asia. But he said reaction from investors to the news had been “constructive.”
“Departures happen and we’ve provisioned for that in making sure other leadership is in place.” Fine was referring to Nikhil Reddy, who becomes Asia-Pacific head and Richard Spencer, who becomes EMEA head, succeeding Garman.
Today’s new-look leadership team presides over a bench of around 280 staff, down from approximately 400 when Goldman Sachs merged its merchant banking and special situations divisions under its broader asset management umbrella in 2019, but in line with what Garman articulates as its long-term headcount target. “We’ve talked for the past couple of years about the business being about 300 people,” he confirmed.
One New York-based capital adviser, who declined to be named, said investors would likely not be concerned about the senior departures, pointing to the bank’s consistent ability to hire talent: “You’re talking about an organization with tremendous resources.” But he said. “Investors just need to be comfortable with their alignment.”
Of Goldman Sachs’ handling of its scrutiny, he added: “I’m sure they’re all over their IR and PR angles. They’ve taken a long-term view on rebuilding their asset management business.”
Clearing up coincidence
The question of key departures comes as Goldman Sachs’ second quarter earnings saw the bank recognize $1.15 billion in write-downs from its balance sheet real estate holdings, prompting onlookers to highlight the challenges organizations investing from their balance sheets face trying to keep their businesses stable.
Indeed, David Fanger, an analyst at rating agency Moody’s Investors Service told Reuters how the results “reflect the limitations of a business mix” which includes principal investments. Also referencing the bank’s investment banking services, he said when “higher interest rates are pressuring valuations, earnings decline more than at a bank with higher recurring revenues.”
Fine said it was inappropriate to judge a profitable balance sheet investing business on the performance of a single quarter. “Over the last cycle, real estate investments on balance sheet have made sizable contributions to the firm’s performance. The track record that is important to clients is much longer term than one quarter where we have written down some of the remnants of that balance sheet portfolio”
He said the quarter’s adjusted real estate valuations does nothing to the firm’s marketing of real estate strategies to clients as it seeks to build upon the $3.5 billion West Street Real Estate Investment Partners core-plus/value-add which closed in April 2022. Onlookers call that vehicle the firm’s comeback private equity real estate fund after a 14-year hiatus following the firm’s legendary Whitehall Street Global Real Estate series. The last fund from that closed in 2008.
Asked whether the write down offered a vindication of the bank’s long-term vision which sees it achieve $225 billion in gross inflows for alternative investments by the end of 2024 – a target raised last year from $150 billion initially – Fine replied: “In a way it does validate it… What it really means is we’re sticking to our plan and taking appropriate action. We mark-to-market appropriately our assets and that’s reflected in the earnings. It’s nothing more than that.”
The New York-based capital adviser said the write-down should be welcomed by prospective fund investors: “The fact they’re taking a mark on the real estate book I view as positive. Investors should like how they’re getting their assets closer to reality.”
Indeed, the recalibration of its residual real estate assets is being positioned as a prelude to the platform’s next incarnation as a real estate equity fund manager. Fine said: “The market condition is what it is – we revisit every day strategically as a business where we think the best opportunities are and what the best ways are to capitalize them – but the firm’s desire to move into a third-party capital orientated business, a client-focused business with the firm continuing to invest our own balance sheet with clients is still entirely the direction of travel.”
Garman added: “The truth is everything we’re trying to do is on track and intact.”
Garman is in the final throes of moving from London to New York to position himself better as sole boss of the platform. “I’ve moved to New York because we’re building a great business here.”
“All the noise about Tak’s departure and the balance sheet write-down – it’s all part of the transition. While people on the outside might be saying, ‘Wow, what’s happening at Goldman Sachs?’ inside the firm we’re calm, measured and moving forward with our plans. That’s the message I want to get out.”
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