Goldman Sachs Group Inc. was founded in 1869 but only last week did it begin targeting the mainstream retail-buyer base for municipal bonds.
The company announced Wednesday that it is teaming up with the Chicago securities distributor Incapital LLC in an exclusive agreement to sell new-issue munis. Incapital maintains a retail distribution network of more than 600 broker-dealers and 400 fee-based advisers.
"We're really acting as Goldman's syndicate desk to the retail-dealer community during the traditional retail offer period," John Radtke, the president of Incapital, said in an interview. "It gives Goldman access to a customer base that they historically have never reached."
Goldman has been lead underwriter on $16.3 billion of munis this calendar year, according to Thomson Reuters. It is best known in the municipal bond world for its institutional distribution, particularly for large issues — the 95 deals it has senior managed this year is the smallest number of deals among the top-10 firms.
Historically, virtually none of Goldman's underwriting has been distributed to the conventional retail base, aside from high-net-worth individuals who can purchase new municipal products through its private wealth division.
"We're helping to create something that's almost unprecedented in the municipal business," Radtke said. "And that's giving retail access to investments that they would never actually see."
Jeff Scruggs, co-head of Goldman's public-sector and infrastructure group, described the agreement as an expansion of a multiyear relationship with Incapital. The firms have worked together for the past three years marketing Goldman's certificates of deposit, plain-vanilla corporate debt and some structured fixed-income products. The addition of municipal products deepens their ties while also offering municipal issuers the chance to market bonds to a wider investment base. "We felt that with the addition of the Incapital relationship, it really rounds out our overall marketing and distribution ability," Scruggs said in an interview.
Retail demand for tax-exempt products has been growing as investors become more concerned with wealth preservation and protecting their portfolios from a potential increase in income tax rates. Federal Reserve data indicates that household holdings of muni debt increased to about 36% of the market in the first quarter of this year from less than 33% in the first quarter of 2008. During that period, total outstanding municipal debt grew 4.6%, to $2.83 trillion from $2.71 trillion, while household holdings surged 8.9% from $937.7 billion, to $1.020 trillion.
Fixed-income analysts at JPMorgan Chase & Co. earlier this summer referred to that increase in retail demand as a shift in the tectonic plates of the market that hasn't been seen since tax laws were changed in 1986.
The Goldman-Incapital agreement was six months in the making and should be rolled out "in the next few days," according to Radtke, who expects it to be fully implemented within the next two months. Incapital will distribute the new-issue bonds initially to a selected group of 175 broker-dealer firms that represent about 85,000 brokers with assets totaling more than $4 trillion, said Radtke, who declined to name which firms were selected.
Incapital, founded in 2001, isn't too well known in muni land. But in the broader fixed-income world it offers underwriting and distribution for corporate debt, U.S. agency bonds, CDs, structured notes and mortgage-backed securities. "The last item or table-leg was municipals," Radtke said of Incapital's expansion in fixed income, noting that more than half of its broker-dealer clients are involved with municipal products. "The muni world might not know Incapital, but munis aren't new to us based on the personnel we have employed," Radtke said. That growing trading team alone has more than 50 years of experience, he said.
Incapital hopes the agreement could raise its profile in the muni world, as it may begin looking to make a presence as a co-underwriter at some point in the future, Radtke said, noting this distribution deal doesn't preclude that.
JPMorgan Chase, another top muni underwriter known for its institutional distribution, also beefed up its retail base recently by tapping into the retail network of Charles Schwab Corp. and extending a 2008 agreement with UBS Wealth Management for an additional two years to 2013. Citigroup accesses retail clients through its own network of nearly 20,000 brokers.
Conversely, the broker-dealer Fidelity Investments benefited from the market dislocation and in recent years ramped up its negotiated underwriting of municipal bonds.
The Goldman-Incapital agreement focuses on traditional tax-exempt products rated investment grade. Build America Bonds, with their long maturities and taxable status, have been more popular among institutional buyers rather than retail buyers, but if market dynamics shift and individual investors become more interested in BABs, this new venture could "absolutely" be a key avenue in that space as well, Scruggs said. Goldman has led 18 BAB deals this year totaling $7.3 billion, ranking it the third-largest underwriter for the stimulus bonds.