- Goldman's Principal Strategic Investments group has made key investments in Kensho and Tradeweb and helped create Wall Street chat platform Symphony.
- "We put blood and sweat into Kensho in a very substantial way," said partner Rana Yared.
- The group has produced annual returns of at least 25% for the past seven years, according to people with knowledge of the business.
In offices high above a running path along Manhattan's West Side Highway, a small group of investors are helping plot the transformation of Goldman Sachs.
But these women and men aren't hostile outsiders. They're an elite band of investors within Goldman — little known beyond tech-investing circles — who use the bank's money to make early, venture capital-style investments in start-ups to help the bank adapt to a digital future.
The team, called Principal Strategic Investments and run by partner Darren Cohen, has $1.5 billion invested in 76 companies from electronic trading market Tradeweb to developer platform GitLab and data analytics firm Crux.
Besides funding tech solutions for Goldman, the group earns a tidy return for the bank: PSI has produced annual returns of at least 25% each of the past seven years, according to people with knowledge of the business. That puts it in the industry's top quartile for performance.
"We spend our time looking at where structural themes have the potential to transform the industry, and ask what are the investments we need to make to help accelerate the firm's transition to the next evolution of our business?" Cohen said in a recent interview at Goldman's headquarters.
"As a function of solving these problems well, a by-product is the companies we pick become very successful," he added.
The 28-person team has grown in importance as Goldman, a famed Wall Street advisor to corporations around the world, has turned its sights on transforming itself. Under CEO David Solomon, the 150-year old investment bank is pushing into new businesses, from retail banking and wealth management to credit cards and corporate payments, all to offset a steep decline in trading revenue.
That means that as Goldman has become more open to change than it's been in decades, top executives have turned to PSI to help navigate uncharted waters, including during the creation of its digital retail bank Marcus in 2016.
"When the idea of consumer banking and commercial banking started to come into the limelight, we helped look at those businesses," Cohen said. After "helping the leadership teams evaluate what today has become Marcus, we started to look at the investable opportunities in the infrastructure around consumer finance, in corporate finance and commercial banking."
So in recent years, PSI gathered a roster of portfolio companies, from digital mortgage firm Better.com to robo-adviser Nutmeg, that may provide clues on Goldman's future moves into consumer finance.
It's also a tacit acknowledgement that despite the fact that Goldman has 9,000 software engineers of its own, many problems are best solved outside the confines of a big bank.
The group, sequestered behind locked doors on the sixth floor of Goldman's Manhattan headquarters, is unusual for the male-dominated world of venture capital. Half of the team are women, including Cohen's main deputy, a 35-year-old partner named Rana Yared. The tight-knit group hails from around the world and speaks 14 languages.
When Goldman takes a stake in a company, it's far from passive. The bank typically sits on the start-ups' boards and connects management with internal teams who would ultimately use the product as well as the bank's network of clients. This can turbocharge the development of a company.
"We understand the problems that many fintech companies are trying to solve and we can help them navigate the ecosystem," Cohen said. "I think that's our biggest edge because we're able to really affect the trajectory of these companies."
An example: Goldman was the first institutional investor in analytics firm Kensho, which was founded in 2013 and sold to S&P Global for $550 million last year.
"We put blood and sweat into Kensho in a very substantial way," Yared said. "We had twice-a-week product meetings with them across our securities and asset management businesses to help iron out the kinks before the product went to market."
But perhaps PSI's biggest difference is the role it's played in the formation of companies since the group's inception in 1999.
At the time, Goldman faced another sea change that threatened its business: Electronic trading was beginning to take over in more asset classes, displacing human traders across Wall Street. So the bank has played key roles in the development of Tradeweb, a bond-trading platform that went public last month, the London Clearing House, and equities exchange Direct Edge, according to Yared.
Still, even within Goldman, PSI wasn't well known until the upheaval of the financial crisis made executives aware of the importance of its investments in trading technology, Cohen said.
As the needs of Goldman evolved, so did PSI. Sometime after Cohen took over PSI in 2012, the bank found that market-moving news was breaking on Twitter before the data sources used by its trading desks. So Goldman engineers created a program to extract data from Twitter, and then a messaging system to help traders share information.
"When I saw that the teams were using it, I was like, this is super interesting," Cohen said.
So in 2014, Cohen helped write the business plan on the wall of his office for an encrypted, cloud-based messaging system. That idea ultimately became Symphony, which is known as Slack for Wall Street and other heavily regulated industries. (Slack is a popular workplace messaging platform that filed to go public last month.) Last year, Symphony was valued at more than $1 billion.
"They're one of the fastest-growing global financial networks today" with 450,000 users across 350 institutional clients, Cohen said. BlackRock and J.P. Morgan were both early investors and users of the system.
As a group that invests in fintech, it's not lost on Cohen that the past few years have seen a massive influx of venture dollars in the industry. While that has made valuations expensive, it's also attracted top talent to the space. There are now 41 fintech unicorns valued at $154 billion, according to CB Insights.
"I would have said three years ago, it has to peak, but the capital flowing into fintech continues to increase with every year," he said. "It's amazing to see the company formation that's happening. You look out five or 10 years and say, wow, it's going to be very different in a good way for consumers, for us, for the world."
Disclosure: Comcast Ventures, the venture arm of Comcast, is an investor in Slack. Comcast owns CNBC parent company NBCUniversal.