Wall Street giant Goldman Sachs has started sharing one of its most popular businesses with some major clients. According to media reports, these asset management clients are mainly insurance companies. Goldman Sachs allows these clients to invest in these asset-backed loans together when providing loans to private credit funds and non-bank lending institutions in Goldman Sachs.

This is the first time that Goldman Sachs' asset management department has shared such investment opportunities for these loans with clients. It is part of the bank's plan to double its private credit management assets over the next five years, reaching $300 billion.

Media reports that Goldman Sachs issues asset-backed loans totaling billions of dollars each year. These loans are called asset-backed loans because they are linked to collateral. For example, if a loan institution financed by Goldman Sachs goes bankrupt, the bank can take over a batch of collateral loans or other consumer loans.

With the explosive growth of the private equity market and regional banks offering similar loans, such as Signature Bank, shutting down, asset-backed loan business is growing rapidly.

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

Analysis suggests that insurance companies' demand for low-risk debt seems endless and is the main driver of private credit industry growth. Insurance companies, especially those selling annuities, profit by earning returns that exceed their payout requirements. To do this, they need to invest in relatively safe debt that flows continuously.

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

In the first half of 2024, Goldman Sachs' FICC department (Fixed Income, Currency, and Commodities) revenue from these asset-backed loans reached $1.7 billion, up 34% year-on-year. The FICC department is part of Goldman Sachs' market team, and its financing department covers the wide range of loans that Goldman Sachs arranges for clients.

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

The financing team is the largest department of Goldman Sachs' Global Banks and Markets department and can turn capital from insurance clients into larger lenders. At the same time, private credit is the second largest department of Goldman Sachs' Asset and Wealth Management department, requiring more assets under management. The private credit team will decide whether to invest customer funds in these asset-backed loans after being informed of available trades by the financing team.