This is one of Goldman Sachs' hottest businesses, planning to double in size within five years, opening up to some clients for the first time

Wall Street giant Goldman Sachs has begun sharing one of its hottest businesses with some major clients. According to reports, these asset management clients are mainly insurance companies, and Goldman Sachs allows them to invest in these asset-backed loans together when the bank provides loans to private credit funds and non-bank lenders.

This is the first time Goldman Sachs' asset management division has shared such investment opportunities with clients. It is part of the bank's plan to double its private credit management assets to $300 billion within the next five years.

Goldman Sachs reportedly issues billions of dollars in asset-backed loans each year, and these loans are called asset-backed loans because they are tied to collateral. For example, if the loan institutions financed by Goldman Sachs go bankrupt, the bank can take over a batch of mortgage loans or other consumer loans.

Currently, with the explosive growth of the private equity market and regional banks like Signature Bank offering similar loans closing, the asset-backed loan business is growing rapidly.

Goldman Sachs previously kept the lowest-risk portion of these loans on its balance sheet and only now is opening up these loans to asset management clients. Goldman Sachs' asset management business will also offer other types of asset-backed loans to insurance clients, such as aircraft financing.

Analysts believe that the demand for low-risk debt from insurance companies seems endless, which is a major driver of growth in the private credit industry. Insurance companies, especially those selling annuities, profit by earning returns that exceed their payout requirements. To do this, they need a steady flow of relatively safe debt to invest in.

For years, insurance companies primarily invested in corporate and government bonds until investment firms like Apollo Global Management, KKR, and Blackstone entered the insurance asset management field by offering the potential for higher returns. These companies either own insurance companies or have exclusive asset management agreements with them, allowing insurance companies to continuously receive new assets to manage. Like Goldman Sachs, these companies are also engaging in more asset-backed loans, mainly to cater to their insurance investors.

In the first half of 2024, Goldman Sachs' FICC (Fixed Income, Currency, and Commodities) department generated $1.7 billion in revenue from such asset-backed loans, a 34% increase year-on-year. The FICC department is part of Goldman Sachs' market team, with its financing division covering a wide range of loans arranged by Goldman Sachs for clients.

Both FICC financing and private credit are crucial for Goldman Sachs to turn losses into profits after exiting consumer lending. Both are aimed at generating more recurring income to offset the bank's more unpredictable investment banking and trading businesses.

The financing team is part of Goldman Sachs' largest department, the Global Banking and Markets division, which can turn capital from insurance clients into larger loans. Meanwhile, private credit is part of Goldman Sachs' second-largest department, the Asset and Wealth Management division, which needs to attract more assets under management. The private credit team will decide whether to invest client funds in these asset-backed loans after being informed of available transactions by the financing team