One of the biggest knocks against private equity, private credit and other alternative investments is that they don't make it easy for investors to pull their money out.
Goldman Sachs is now looking to solve this problem for registered investment advisory firms that choose it as a custodian for the safekeeping of their clients' assets. Earlier this month, the Wall Street giant's advisor solutions division announced that the firm will begin lending against select private equity, credit and other alternative investments held as part of its custodial services for RIAs.
Jeremy Eisenstein, a managing director and co-head of custody sales at Goldman Sachs Advisor Solutions, said the new borrowing option comes amid Goldman's efforts to open alternative markets a bit more to advisory firms.
"A big question has always been: 'How do I as an advisor allow my clients to get further diversity and to get access to these unique opportunities, but also still provide the liquidity that they may need?'" Eisenstein said. "Historically, they wouldn't be able to get liquidity on their alternatives in the independent space. Now they can."
A borrower be
Many of Goldman's largest competitors in the business of providing custodial services to RIAs and hybrid advisor-brokerage firms already allow clients to put up stocks, bonds and other traditional assets as collateral for borrowing purposes. The loans these firms make against that collateral are typically offered at varying rates of interest to RIA clients who meet specific qualifications. Goldman's new offering essentially adds to the list of investments that can be used for those purposes.
Eisenstein said the new borrowing ability gives clients a way to generate immediate cash flow from a type of investment that historically has not been very liquid. Unlike stocks that can be sold when wanted on public markets, private vehicles often lock money up for long periods of time.
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Many vehicles such as private real estate investment trusts, or REITs, have tried to provide more liquidity by letting investors take their money out at specified intervals. But even they usually set limits on how much can be withdrawn at once.
Goldman's offering, Eisenstein said, is meant to couple the potential for higher returns from alternative investments with some of the ability to obtain cash when needed.
"Having these other types of asset classes in high net worth and ultrahigh net worth portfolios, that really leans into diversification, which allows for flexibility and more choice for our clients," he said. "We just want to take that next step by also providing the client with some lendable value against that — so you can go buy your second home in Florida."
Crowded custodial market
Goldman's new offering comes amid the firm's push to distinguish itself in the custody business.
The research firm Cerulli has found that more than 80% of the custody market is controlled by four players: Charles Schwab's Schwab Advisor Services, Fidelity Institutional, BNY Mellon's Pershing and LPL Financial. But growth in demand for custody services driven largely by RIAs' desire to diversify where they're holding client assets means there's room for new entrants.
The SEC's custody rules generally require advisory firms to hold client assets such as stocks, bonds and mutual funds at banks, brokerages and other third parties for safekeeping. The rule is mainly meant to provide a separate set of eyes to monitor accounts for untoward activities.
Joel Bruckenstein, the president of Technology Tools for Today, or T3, said Tuesday that Goldman's decision to allow borrowing against private equity, private credit and similar vehicles is exactly what's needed for a firm that's looking to break into the crowded custody business.
Bruckenstein said many firms might hesitate to allow alternatives to be used as collateral; because they're not traded on public markets, these sorts of investments can be particularly difficult to assign values to. But Goldman, with its expertise in private markets and connections to various asset managers, is a different story, Bruckenstein said.
"They're going to be as good as anybody at figuring out the true value of those assets," he said. "And if they can do it and be successful at it, that is something that's unique and that's a differentiator for them."
T3's Inside Information Advisor Software Survey, a poll of 2,917 advisory firms released in January, found that Goldman Sachs Advisor Solutions controls less than 1% of the market for custodial services. That's well below the nearly 40% wielded by Charles Schwab.
Slow start but gaining steam
Bruckenstein said Goldman's custodian offering initially got off to a slower start than a lot of people had expected.
"But from what I understand, it's picking up traction now," he said. "It just took a little while for people to suss it out."
Goldman's custodial business dates to 2020 with its purchase of Folio Financial, a self-clearing custodian with $11 billion in assets at the time. Following a somewhat slow start, Goldman has been adding some big names as custodial clients over the past year.
They include the firms Creative Planning, Prime Capital Investment Advisors and NewEdge Wealth. Also among the custodial partners are smaller players like Burney Company, an RIA in Reston, Virginia, with roughly $2.7 billion under management.
Lowell Pratt, the president of Burney Company, specifically cited the access Goldman could offer to alternative markets when announcing the firm's addition as a custodian in August. Speaking on Tuesday, Pratt said he has been impressed at how easy Goldman Sachs Advisory Solutions' systems make it for his clients to gain access to new types of investments but also borrow money against assets already in their portfolios.
"The process for approval on some systems can oftentimes take a day or two, to get an approval for a withdrawal," Pratt said. "At Goldman, you enter the information and it's almost instantaneously approved."
'Commonsense kind of move'
Pratt, who works with both mass affluent and high net worth clients, said he recommends the typical portfolio be split into a 60-20-20 allocation. Three-fifths goes into stocks, one-fifth into bonds and the last fifth into alternatives.
He said he puts great trust in Goldman's ability to pick out the best opportunities in the opaque private markets.
"With most of the privates, it's very important you can access the top-drawer managers," Pratt said. "So being able to access them through Goldman, and with smaller asset commitments, is definitely a big needle mover for us."
Pratt said he does foresee himself signing clients up to borrow against some of those alternative assets. That's not to say, he added, that all of them will take advantage of that opportunity, but at least they'll have it should they need it.
"If I'm managing an account with $1 million in assets, and $200,000 of that is in alternatives, now I'll have the whole $1 million available for lending and securitization, versus just the $800,000 before," Pratt said. "This is just a commonsense kind of move."
