Goldman Sachs 2012 Annual Report Download - page 58

Management’s Discussion and Analysis
2011 versus 2010. Net revenues in Investing & Lending
were $2.14 billion and $7.54 billion for 2011 and 2010,
respectively. During 2011, Investing & Lending results
reflected an operating environment characterized by a
significant decline in equity markets in Europe and Asia,
and unfavorable credit markets that were negatively
impacted by increased concerns regarding the weakened
state of global economies, including heightened European
sovereign debt risk. Results for 2011 included a loss of
$517 million from our investment in the ordinary shares of
ICBC and net gains of $1.12 billion from other investments
in equities, primarily in private equities, partially offset by
losses from public equities. In addition, Investing &
Lending included net revenues of $96 million from debt
securities and loans. This amount includes approximately
$1 billion of unrealized losses related to relationship
lending activities, including the effect of hedges, offset by
net interest income and net gains from other debt securities
and loans. Results for 2011 also included other net
revenues of $1.44 billion, principally related to our
consolidated investment entities.
Results for 2010 included a gain of $747 million from our
investment in the ordinary shares of ICBC, a net gain of
$2.69 billion from other investments in equities, a net gain
of $2.60 billion from debt securities and loans and other net
revenues of $1.51 billion, principally related to our
consolidated investment entities. The net gain from other
investments in equities was primarily driven by an increase
in global equity markets, which resulted in appreciation of
both our public and private equity positions and provided
favorable conditions for initial public offerings. The net
gains and net interest from debt securities and loans
primarily reflected the impact of tighter credit spreads and
favorable credit markets during the year, which provided
favorable conditions for borrowers to refinance.
Operating expenses were $2.67 billion for 2011, 20%
lower than 2010, due to decreased compensation and
benefits expenses, primarily resulting from lower net
revenues. This decrease was partially offset by the impact of
impairment charges related to consolidated investments
during 2011. Pre-tax loss was $531 million in 2011,
compared with pre-tax earnings of $4.18 billion in 2010.
Investment Management
Investment Management provides investment management
services and offers investment products (primarily through
separately managed accounts and commingled vehicles,
such as mutual funds and private investment funds) across
all major asset classes to a diverse set of institutional and
individual clients. Investment Management also offers
wealth advisory services, including portfolio management
and financial counseling, and brokerage and other
transaction services to high-net-worth individuals
and families.
Assets under supervision include assets under management
and other client assets. Assets under management include
client assets where we earn a fee for managing assets on a
discretionary basis. This includes net assets in our mutual
funds, hedge funds, credit funds and private equity funds
(including real estate funds), and separately managed
accounts for institutional and individual investors. Other
client assets include client assets invested with third-party
managers, private bank deposits and assets related to
advisory relationships where we earn a fee for advisory and
other services, but do not have discretion over the assets.
Assets under supervision do not include the self-directed
brokerage accounts of our clients.
Assets under management and other client assets typically
generate fees as a percentage of net asset value, which vary
by asset class and are affected by investment performance
as well as asset inflows and redemptions.
In certain circumstances, we are also entitled to receive
incentive fees based on a percentage of a fund’s return or
when the return exceeds a specified benchmark or other
performance targets. Incentive fees are recognized only
when all material contingencies are resolved.
The table below presents the operating results of our
Investment Management segment.
Year Ended December
in millions 2012 2011 2010
Management and other fees $4,105 $4,188 $3,956
Incentive fees 701 323 527
Transaction revenues 416 523 531
Total net revenues 5,222 5,034 5,014
Operating expenses 4,294 4,020 4,082
Pre-tax earnings $ 928 $1,014 $ 932
56 Goldman Sachs 2012 Annual Report