Goldman soon will begin marketing a new corporate buyout fund of between $ 5 billion and $ 8 billion, according to people familiar with the matter, its first such fund since the financial crisis. It is aiming for an initial close by the end of the year, the people said.
The effort shows Goldman’s commitment to a corner of Wall Street that many rivals have abandoned. But it also looks very different than Goldman’s past funds, and reflects the impact of regulators, who have tried to discourage banks from risky investing.
For one thing, the new buyout fund is smaller than prior ones, less than half the $ 20 billion Goldman raised in 2007 for GS Capital Partners VI. And Goldman will contribute just a tiny slice of its own capital this time, the people said, to comply with post-crisis rules meant to make banks safer.
It also won’t carry Goldman’s name. The new pool is named West Street Capital Partners, after the bank’s lower Manhattan address, in order to comply with a post-crisis rule that prevents private equity funds from bearing the parent bank’s name.
The new fund shows how the “Volcker rule” has changed life at banks. Big lenders and Wall Street firms used to make bets with their own balance sheets.
Under the Volcker rule, passed as part of the Dodd-Frank financial law in 2010, banks can contribute no more than 3% of the money raised by private equity or hedge funds, and those investments in total can’t exceed 3% of the bank’s overall capital.
Goldman’s new fundraising will hit as private equity firms are having trouble putting money to work. Assets are expensive as US stocks have hit records, and they face tough competition from corporate acquirers, which can usually afford to pay more.
Private equity – by which firms buy companies, typically with borrowed money, and seek to improve and then sell the business – can be lucrative.
Goldman’s fifth buyout fund, an $ 8.5 billion pool raised in 2005,returned 2.5 times its money, and a 2000 fund returned just over twice its money, according to a person familiar with the matter. The 2007 fund has returned $ 22 billion so far and is expected to eventually make about 1.5 times its money, a person familiar with the matter said.
But these heavily leveraged deals can backfire. Goldman was among the firms that took utility giant TXU Corp private in 2007. That company later filed for bankruptcy after natural-gas prices turned, wiping out the private equity firms’ stakes.
To keep those big swings from infecting other parts of banks, regulators have made those investments more expensive by requiring banks to hold extra capital cushions against them, which dents shareholder returns.
Amid the new rules and a general push on Wall Street to slim down, many banks abandoned private equity. JP Morgan spun off its in-house buyouts team, One Equity Partners, in 2015. Bank of America in 2010 sold one internal fund and spun off another.
Goldman Sachs held on more tightly. The decision was in part a bet that the bank could navigate the new rules, and in part a reflection of a long history in merchant banking dating back to 1986.
Goldman’s private equity arm oversees $ 65 billion in assets, split roughly evenly between private equity buyouts, lending and real estate and infrastructure.
Its fees flow into Goldman’s investment management unit, where revenues are up about 20% over the past five years. Its principal returns are folded into the bank’s investing and lending activities, which reported $ 5.4 billion in revenue last year, about 16% of total revenues, but more than one-third of Goldman’s 2015 profits.
Still, Goldman has found fundraising tougher since the crisis. An energy fund that had been set to launch in 2009 was put on hold for more than a year and ultimately raised $ 1.1 billion, less than the $ 2 billion to $ 3 billion Goldman targeted, according to people familiar with the matter.
Some investors worried that because Goldman had little of its own money in the fund, its incentives were less aligned with investors, some of the people said.
Before the crisis, Goldman itself contributed up to one-third of funds’ capital, something it can no longer do under the Volcker rule. Until now, Goldman pivoted away from formal fund raises and instead focused on pooling money for individual deals, often partnering with another private equity firm. In 2014, it teamed with Blackstone Group to acquire market-intelligence provider Ipreo.
The new fund is a return of sorts to the traditional private equity playbook. One downside is that Goldman can put little of its own cash in, which limits potential profits. But with a fund at the ready, Goldman can be nimbler on investments, and gains a new offering for its wealthy clients.
The bank hopes to raise $ 500 million or so from Goldman employees, the people said, which wouldn’t count against the 3% limit but could help assure clients that their interests and the bank’s are aligned.
Write to Liz Hoffman at firstname.lastname@example.org
This article was published by The Wall Street Journal