It is hard to know given Goldman's limited disclosure of their alternative asset management activities, which encompass a range of businesses and streams of cash flows to rival Blackstone's. But exactly how large, diverse and profitable is it? Don't you think that better understanding these facts could have a material, positive impact on the analyst community's perception of its growth prospects, stability of cash flows and, therefore, its P/E?
The common solution to this problem through much of the 1980's and 1990's was either a partial IPO of the mis-valued business unit or the issuance of a tracking stock, both of which are costly, complex and frequently misunderstood by the marketplace. A full sale or spin-off are also possibilities but not realistic in light of the strategic importance of Goldman's alternatives business to its overall franchise.
But an interesting column in Friday's Financial Times by Thorold Barker posited a simple and elegant yet potentially very powerful solution to Goldman's problem: better disclosure of its alternative asset management activities. And after considering this approach in light of the universe of possibilities, I came to a very clear conclusion: Mr. Barker is absolutely right. And Goldman should heed his words if they know what is good for their employees' pocketbooks - and those of their outside investors.
As a former financial engineer, I am not one to shy away from complexity if it either serves to materially increase value or reduce risk. That said, sometimes the easier solution is the better one. This is one of those cases. Let's consider for a moment that Goldman's alternatives platform should trade at a multiple similar to Fortress. It could be argued that Goldman's portfolio is both larger and more diversified than Fortress's, and should, therefore, trade at an even higher multiple.
But let's say for the moment that it could fairly trade at 30x. Without running many numbers one can see that the rest of Goldman's business could effectively be gotten for free, which is truly insane if one looks at the comparables. Even if the alternatives franchise is valued at only 20x, one is still valuing the firm's market leading broker/dealer activities at close to nothing.
This is clearly a case where something has to give - either Goldman is being valued at some 50% of its fair market value or Fortress (and, shortly, Blackstone) are grossly overvalued. In truth, the right answer probably lies somewhere in between. But in any event, Mr. Blankfein and the Goldman Board should strongly consider some enhanced transparency of its alternatives business in order to drive a sharp upward spike in valuation.
I think this is a small price to pay for tens of billions of value creation. And the PR benefits of better, more complete disclosure wouldn't hurt, either. And they'd be a trail blazer among the top tier of the investment banking community. The answer is clear. All that remains is to just do it.
GS 1-yr chart: