In 2007, Goldman Sachs Group Inc. raised one of the biggest
private-equity funds ever. Nine years later, it is readying a
sequel more tailored for the times.
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
postcrisis 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 postcrisis 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 U.S.
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 2007fund 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. J.P. Morgan Chase &
Co. spun off its in-house buyouts team, One Equity Partners, in
2015. Bank of America Corp. 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. The unit also was responsible for 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 LP 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.
(END) Dow Jones Newswires
July 21, 2016 19:15 ET (23:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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