Bloomberg’s bonus calculator offers a revealing look at the divergent value of Wall Street employee payouts. A stock award of $100,000 from JPMorgan Chase & Co. in 2022 would now be worth $115,000 fully vested; the same from Bank of America Corp. is worth only $83,000. Pity the poor traders from Deutsche Bank AG (and, before it collapsed, Credit Suisse) whose stock grants would regularly depreciate before they were able to cash them in.
But the power of their stock isn’t the only way firms differentiate themselves (and no, I’m not talking about “culture”). Among the many benefits that banks provide – health services, childcare centers, fitness facilities and so on – one of them is access to special investment programs. “The firm also looks to offer additional wealth-creation opportunities, including the Employee Special Investment Program,” trumpets Goldman Sachs Group Inc. at the bottom of its benefits webpage.
These schemes allow access to funds that otherwise might not be available to employees, on terms that certainly wouldn’t. Last week, the Financial Times reported that Goldman Sachs slashed the minimum investment on its latest 1869 Private Opportunities Partners fund to $25,000 from $250,000. The fund, which takes its name from the year the firm was founded, invests across multiple private-market vehicles managed by its asset-management division. It is open to former employees who pay annual fees of just 0.63% plus 6.3% on performance – a 50% discount to what the bank would normally charge outside investors.
The 1869 fund is unique in catering to alumni, but there are plenty of investment opportunities open to Goldman’s current 46,500 employees and, in particular, its 400 or so partners. These funds generally don’t levy management or incentive fees; in some cases, employees even get a share of the incentive fees paid by third-party investors. In an environment where some of the best opportunities reside in private markets rather than public, access to these funds is an attractive benefit.
While the firm doesn’t disclose assets it manages on behalf of employees, it does disclose how much capital its executive officers take out. In the past five years, Chief Executive Officer David Solomon has received $65 million from employee funds, made up of both distributions and redemptions. That’s equivalent to almost half what he earned in salary and bonuses. Chief Operating Officer John Waldron may not have partaken of the fund opportunity as much: He pulled out $15 million over the period, equivalent to 11% of his total pay. Between them, the pair also earned $4 million from incentive fees levied on paying customers.
As a vehicle for wealth creation, Goldman’s funds have a strong track record. Since 2000, the firm’s private equity funds, marketed under the brand West Street Capital Partners, have returned over two times capital before fees. This fund series has proved popular with staff. Its 2000 vintage, which returned 2.5 times its original investment, sourced around 18% of its capital from employees. Across the five vintages since then, employee contributions have averaged around 10%. The firm is currently raising capital for West Street Capital Partners IX, in which it targets around $1 billion from staff.
In some cases, firms will even provide leverage against employees’ own contributions. Loans aren’t as generous as in the past when they allowed staff to double their exposure, but they still account for further upside. Problems can arise, though, if employees max out too much on internal funds. In 2008, Goldman had to bail out two senior executives who were short of cash, paying $58 million to repurchase some of their investments in internal funds to avoid their having to sell Goldman shares.
Goldman Sachs is somewhat unique in marrying a trading and banking business with a thriving alternative asset management business. It currently oversees $525 billion of alternative assets to which it gives traders and bankers exposure partly to “provide alignment with the firm’s strategy to grow the alternatives business.” The link offers Goldman a key advantage. Stock may be one way for Wall Street firms to distinguish themselves; access can be as useful a currency.
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