The Wall Street giant already dominates league-table rankings as a top deal maker and underwriter to companies around the world. In 2019, Goldman was the No. 1 adviser on M&A globally after working on 69 deals with an aggregate value of $289.48 billion, according to S&P Global Market Intelligence data. The investment bank's executives say it has been the top M&A adviser for 19 of the last 20 years.Goldman Sachs Group Inc. is bolstering
But it is not content quite yet.
At Goldman's first-ever investor day, executives laid out plans to accelerate the investment bank's growth in part by targeting sectors where it still lags its rivals, moving into transaction banking and expanding downstream. The move into the middle market alone could prove lucrative for Goldman. The firm's co-head of investment banking, Gregg Lemkau, said at the investor day that the kind of company Goldman will begin courting generated about $8 billion on average in annual banking fees across Wall Street over the last five years.
"We are the No. 1 investment bank, but we are not No. 1 in every industry and geography globally," Goldman President and COO John Waldron said at the Jan. 29 event. "We've identified real gaps and opportunities where we know we can improve upon our relative position."
The investment bank's expansion comes amid a wider shake-up at Goldman that has occurred under Chairman and CEO David Solomon, a former investment banker now in his second year at the company's helm. Goldman has pursued consumer banking and wealth management as sources of more stable revenue compared with its traditional businesses, which ebb and flow with activity in M&A and capital markets. Solomon has overseen consumer banking's growing importance to Goldman, but the expansion further into middle-market investment banking shows that the company is not backing away from its legacy business.
Goldman has largely tailored its investment banking business for bigger companies, helping them enter the public markets, advising them on deals or raising capital on their behalf. Today, its investment bank covers 95% of companies in the Americas, Europe, the Middle East and Africa that are valued at more than $10 billion and 80% of companies there with market values ranging from $2 billion to $10 billion. That strategy has paid dividends, as Goldman commands 18% of fees from deals involving those largest companies and 16% for those involving companies valued at $2 billion to $10 billion.
Now, it wants to take that same philosophy to smaller deal markets. The investment bank currently covers 44% of companies with market values of $500 million to $2 billion in the Americas and EMEA, while only capturing 10% of M&A fees.
"There are a limited number of companies currently in the marketplace that they have focused on in the past," RBC Capital Markets analyst Gerard Cassidy said in an interview. "To grow the business, you need to downsize, try to find smaller companies and raise capital for them on a go-forward basis."
The middle market build-out began in April 2019 with the creation of what Goldman calls its cross-market group, which is structured to more closely resemble how the bank handles larger deals and offerings. The group consists of specialists who focus on one of seven specific industries, in addition to those who specialize in M&A or certain types of offerings, a spokesperson said in an interview after the investor day.
Goldman plans to expand its coverage universe to north of 11,000 by adding another 1,700 companies, though those are not exclusive to the middle market. That will provide a stronger base for serving smaller companies, Goldman's Lemkau said.
"It isn't that these companies don't need Goldman Sachs' services, and it isn't that we don't know how to serve companies of this size," Lemkau said. "The issue is we just don't cover enough of them."
Yet, one of the biggest opportunities for Goldman and its investment bank moving forward lies in an entirely new business line: transaction banking.
The bank is expecting its transaction banking platform to fully launch in the first half of 2020. Along with other services, the system will allow clients to park their cash with Goldman, which will then deal with some of their clients' payments and vendors. Goldman projects that transaction banking will become a $1 billion revenue opportunity in the long run.
"We are very well positioned to succeed in this market," Goldman's COO, Waldron, said. "The combination of this scaled market opportunity and our clear value proposition gives me real conviction that we have a clear ability here to build a very large-scale business where even with modest share in this highly fragmented market, we can build a valuable business."
