GSAM looks to build on huge OCIO win earlier this year

Goldman Sachs Asset Management's senior leadership is riding high on a huge outsourced CIO contract the firm won earlier this year, from aerospace and defense company BAE Systems, London.

The mandate started less than three weeks ago, and is the largest OCIO contract to be awarded in the U.K. About £23 billion ($28.9 billion) in defined benefit assets across the BAE Systems Section and the Airbus Section moved to the money manager along with the in-house team at BAE Systems Pension Funds Investment Management.

Winning the mandate "is super exciting for us at Goldman because it's the biggest one to date," said Fadi Abuali, CEO of Goldman Sachs Asset Management International, in an exclusive interview that included GSAM and BAE pension fund executives.

GSAM is not only a major player in the roughly £200 billion U.K. OCIO industry — although opportunities remain there — but it also expects to see more activity in Continental Europe, where it is benefiting from the integration of NN Investment Partners last year.

"We are second" in terms of largest OCIO providers globally. "We're going to be focused on a lot of really strategic opportunities to grow our business," Abuali said.

The latest Pensions & Investments data shows GSAM had $246.8 billion in worldwide outsourced assets under management as of March 31, which wouldn't include the BAE Systems deal. The firm trails only Mercer, which had $337.7 billion as of that date, and is ahead of BlackRock's $197 billion.

OCIO is a business where "scale matters, and having the right investment in the right people, and of course talent, is super important," Abuali said. "With BAE we get a lot of great talent."

The deal also creates stability, continuity and "frankly speaks to the ethos of what we're trying to do, which is partner with like-minded pensions and help our corporate clients as well to deliver solutions that are bespoke, complex, but are value-added for the stakeholders — whether that's the scheme or the corporate. With the benefit of scale we're going to be able to deliver a lot more to the schemes," Abuali added.

Pensions & Investments first reported in August that aerospace and defense company BAE Systems was considering an OCIO arrangement for its U.K. pension fund, and GSAM announced in September it had been victorious.

Forty-nine BAPFIM staff members were offered jobs, said Ed Francis, head of U.K. fiduciary management at GSAM, in the interview with P&I.

That team had done a good job of getting the pension fund into shape — on a technical provisions basis, the plans were fully funded at the last triennial valuation in March 2021.

"With the U.K. schemes fully funded, a sound investment strategy and a strong team in place, that was the time to look at the market and see what was out there," said Andrew Gallagher, chair of the BAE pension fund trustees, in the same interview. The trustee board — made up of 18 members, half of whom are member-nominated trustees, while others have union and industrial backgrounds — had conversations about how BAE Systems was a defense and aerospace company with "a portfolio of (about) £25 billion invested in some sophisticated assets," Gallagher said.

The trustees had noted a June 2021 deal that saw British Airways, Harmondsworth, England, transfer £21.5 billion in assets and employees of the in-house team at British Airways Pension Investment Management to BlackRock under an OCIO arrangement. "We knew there were opportunities to do that. We thought managing our portfolios would be a reasonably attractive opportunity for somebody," Gallagher said.

The trustees, along with its advisers, tested the market and engaged in a competitive tender process.

The trustees had a number of conversations about the process with different views considered, Gallagher said: Was it the right thing to do? How should a competition be run? And who should be selected?

"Each one of those discussions was full and frank and fair, and I saw it as my duty to make sure all of it was put on the table," he said.

Gallagher was also sensitive to how the changes were communicated to the team. "Quite a few of the (team) liked the bespoke, in-house environment, a small team."

Briefing sessions were run for the teams as the company and the trustee supported the team through the change. "It was fundamental to the trustee that BAPFIM as a unit remained focused on doing the job and recognized that people had their future in mind as we went through that process," Gallagher said.

Ultimately, it was GSAM's commitment to understanding the plan and its needs that put it above its competitors.

"We ended up in a competition with some very credible contestants, and gradually whittled it down. And without being unkind to GSAM, there would have been others who could have done it. That focus on a bespoke proposal, the work to understand the scheme and the strategy … they made it really clear they wanted to do this job. And that was attractive," Gallagher said. He also highlighted the firm's willingness to engage with the trustees. The GSAM team also recognized the many stakeholders in the situation, including the trustees, the sponsors and the job of the membership.

Transferring the team to GSAM also gives them "support with career opportunities," Gallagher said. At the time the deal was announced, GSAM's Francis told P&I that the team of 49 would all be offered roles, many initially working primarily on the BAE pension funds but, over time, being integrated fully into the team and working across other GSAM clients.

Broadly, the reasons for corporates looking to offload the management of their pension funds — along with transferring the teams running those assets in-house — include the human resources challenge for a non-investment company running a relatively small asset management team, which is "significant," Francis said. Key-person issues also arise over time, and "the general derisking of U.K. DB has meant that the skill sets that were created within those internal teams … have become a bit less relevant to the future of those DB schemes" — but can be highly relevant for a diversified asset manager like GSAM, Francis added.

Beyond OCIO, Abuali is eyeing private markets, where there are "interesting investing opportunities, particularly in private credit. But there will be at some point a shift in the risk back towards the equity-like markets."

But there is always room for growth. "We've tried to deliver a platform that delivers solutions to our clients in almost every asset class. If I was going to point to something where I think we're a little bit behind — but we're catching up — is the ETF market. That's an area we're trying to grow" on the active side, Abuali said.