The GFC and resulting regulations have driven major changes across the financial services landscape, and as capital flows are driven out of public markets, the makeup of financial services across the spectrum from large to small companies is changing at an accelerated pace.
I previously wrote about how classic M&A boutiques are extending their reach by entering Capital Markets. Yesterday, I caught pieces of the Goldman Sachs presentation at the Bernstein conference (which has had great speakers). It made me realize that what I had previously written about regarding M&A boutiques was perhaps a smaller part of a larger shift.
I’ll call that shift the “vertical integration of private market investing.” I’ve listened to many Goldman presentations over the past year or two, but it’s admittedly been hard for me to wrap my mind around exactly what they are trying to accomplish. For whatever reason, John Waldron’s (COO) presentation cleared a lot of the mental blockers I had.
Put simply, the strategy integrates:
- Origination: Via its #1 global M&A practice
- Investing: Via its 3rd party funds, SMAs, and balance sheet to support alternatives, public, FI, and other investing.
- Distribution: Via its marquee wealth management business
Often investment firms today will originate via 3rd party bankers and distribute solely to institutional LPs (vs UHNW / HNW / Others).
Given the rush to both originate investments and distribute them across a broader set of clients in today’s market environment, Goldman has the obvious pieces that competitor investment firms are currently trying to build aggressively (I’m viewing GS as an investment firm today – obviously it can be viewed from the bank angle most other days, but their current growth strategy centers around being a asset and wealth management) .
It’s like they woke up one day and said “Why the fuck is Blackstone worth more than us? Is this a sick joke? Let’s fix this.”
Another firm pursuing a similar strategy, albeit with the pieces currently immature, is B. Riley Financial. Their core is small cap Capital Markets, and around it they are buying / building practices in investment banking and wealth management to bolster their product set but also to complete their ability to originate and distribute effectively.
On origination:
I think a lot of our competitors probably are hindered — not hindered, but are a little bit more focused on just one segment. So let’s just call that the investment banking broker-dealer side. So I don’t know if there’s a lot of comps to us. I mean I would say, there’s firms out there like a KKR ,where they do have a broker-dealer and they do have some advisory and they really utilize that, but the main focus is private equity. We’re kind of the opposite. We really lead with our investment banking broker-dealer, and then we see these proprietary opportunities that we are willing to invest in, and I think that differentiates it.
RILY Q4-2021 Earnings Transcript
On distribution:
Brett, you have understand is that the benefit that [our wealth management business] also has is in — sometimes it creeps to other parts of the businesses. They have been referrals in M&A that goes into Capital Markets. They have been participants in our deals that help our deals get done. So there is another benefit that doesn’t get picked up in the line item of the sub, but it’s a big benefit.
RILY Q1-2022 Earnings Transcript
Alas, I believe this trend is going to reshape the financial services landscape beneath the mega money center banks and set the stage for the next decade of transactions. As for winners and losers, that’s something I’ll leave for someone else to figure out. 😉
Disclosure: I may own shares in companies mentioned. This is not investment advice. Do your own work.