Unlocking Value At Goldman Sachs: Spin-Off or Transparency?

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Last week we launched our Big Idea feature by proposing that Goldman Sachs spin-off its hedge fund business. Our hope was that it would start a discussion in the financial community about what direction the firm should take to increase its market value. It took a couple of days, but it looks like the discussion is underway. Today we look at two of the reactions to our Big Idea.
The first comes our way from Thorold Barker in the Financial Times. Barker starts out where we did—the observation that Goldman Sachs may be undervalued given the prices Wall Street is paying for other financial assets. “Goldman Sachs has long faced accusations of being a massive hedge fund with private equity business dressed up as an investment bank. If so, it is not being valued like one,” Barker writes.
Barker is skeptical that Goldman Sachs would take the spin-off path. Although a spin-off would allow Goldman to realize the market value of its hedge funds, Barker believes that Goldman would “not relish” giving up its lucrative hedge fund business and might not want to lose some of the strategic advantages that come with having squads of sophisticated hedge fund traders working in-house.
In our reporting since we proposed the spin-off we’ve come across another objection. People familiar with some of the top managers at Goldman do not believe the firm would have the audacity to depart so abruptly from the dominant model on Wall Street. As other banks build themselves into more complex, larger financial institutions, in part by buying up hedge funds, Goldman would be setting itself far apart from the crowd if it moved in the opposite direction. Our sources don’t think the senior management at Goldman is willing to risk the wrath of shareholders and public opinion by betting against the orthodoxy of growth.
Barker has another idea: Goldman needs to open up its hood and start showing us how its engines run, he writes.

The easiest option would be for Goldman to take the boom in alternative asset management as a sign that it is time for more transparency.
If it believes it is being short-changed on valuation it could give more detail on exactly how it generates profits in its different businesses. In that way, investors could get more comfortable with the mechanics of the group (even if that meant seeing the gut-wrenching volatility in some areas). This would also give investors a clearer view of what the sum of Goldman’s parts is really worth.

One difficulty with this idea is that it risks giving away the keys to the kingdom. Many hedge funds attempt to keep their inner-workings from the public eye for fear that exposure might invite copycats or counter-strategies from rivals. A new openness at Goldman might allow investors to better understand how Goldman makes money, but it would also allow competitors to gain this understand. The current thinking at Goldman, we’re told, is that this risk is not worth taking.
On Wall Street: The transparent alternative for Goldman [Financial Times]