GS Goldman Sachs Group Inc

Investment bank to raise $2.5 billion to revive a fund business that once thrived Wall Street giant to raise $2.5 billion in fund as CEO Solomon pushes reorganization

By Peter Grant 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 31, 2019).

Goldman Sachs Group Inc.'s newly reorganized real-estate investment unit is reviving a fund business that the firm shut down after it suffered steep losses during the financial crisis.

The new group is raising a $2.5 billion real-estate fund structured similarly to the former Whitehall family of property funds, according to people familiar with the matter. This business thrived in the 1990s and early 2000s, turning big profits on deals such as New York's Rockefeller Center and Canada real estate giant Cadillac Fairview Corp.

But Goldman quietly let the program expire a few years ago after it ran aground with soured bets like New York's Helmsley Building and the Stratosphere, a Las Vegas casino that Goldman sold in 2017 for about $450 million less than it paid for it a decade earlier, according to people familiar with the matter.

One Whitehall fund, which invested near the top of the market before the 2008 crash, once reported a value of less than 20 cents on the dollar, though it eventually returned investors about 75% of their money, these people said.

The new real estate unit is part of a broader reorganization engineered by Goldman Chief Executive David Solomon, who took over last fall. Mr. Solomon wants the firm to focus more on making investments for third parties and generating fees.

The real-estate business will be a prime testing ground for that strategy. The firm has purchased about $30 billion worth of real estate since 2012 but primarily using its own capital, the people familiar with the matter said.

Under the new strategy, Goldman hopes to launch a series of real-estate funds starting with the $2.5 billion fund that will look for property in the U.S., Europe and Asia. Goldman hopes to launch a second fund toward the end of next year, these people said.

Goldman already has started purchasing property that will likely be included in the fund, including a stake in a 4,300-bed portfolio of student housing in Orlando, Fla., Tucson, Ariz., East Lansing, Mich., and other cities from Chicago-based Core Spaces, the developer and operator. The deal valued the portfolio at over $600 million.

The bank is consolidating all its real estate activity -- which include a mezzanine debt fund business and equity investments made by the firm's special-situations group -- in the merchant banking division. The operations now have offices in the U.S., Europe and Asia and employ more than 350 professionals.

The business "had grown to a scale where the opportunities we were seeing exceeded the aggregate capacity of the balance sheet," said Julian Salisbury, one of the new co-heads of merchant banking who oversees real estate.

Goldman's new real-estate fund business aims to take on less risk and target lower returns than the Whitehall funds did. The new fund will limit debt on property to no more than 60% of its value and target returns in the 12% to 15% range. Whitehall aimed for annual returns in the high teens and its leverage would sometimes exceed 80%. Goldman expects to increase leverage in future funds, the people familiar with the matter said.

Goldman also will seek to raise capital for the new real-estate fund from both institutional investors and wealthy individuals. Whitehall raised most of its money from the latter.

Goldman will "invest a lot of our money" in the new real-estate fund, just as the firm and its employees put their money in the Whitehall funds, Mr. Salisbury added.

Goldman's real-estate business wasn't the only one to get clobbered after making big bets late in the previous real-estate cycle. Property losses at Lehman Brothers Holdings Inc. were a major cause of its demise. Morgan Stanley's real-estate business also suffered major losses and stopped raising private-equity funds for years after the crash.

But Goldman has been late in getting back to the real-estate fund game. Morgan Stanley closed its first-post crash private-equity fund in 2015 at $1.7 billion. It raised another $2.7 billion fund in 2017.

Mr. Solomon's reorganization remains a work in progress. The leadership of the new real estate group has been set, but it is still not clear how well the different groups from disparate parts of the Goldman empire will work together in the fiercely competitive culture.

Goldman also has to deal with the ghosts of Whitehall. Because that fund family was known so well, the name often comes up, creating a potential obstacle for Goldman's sales force when approaching investors for new commitments, according to industry participants.

The Whitehall reputation will "make the initial conversations a little bit harder," Mr. Salisbury said. But he predicted that once investors start "peeling back the onion" they'll realize "this is going to look like a very compelling, well-aligned opportunity for people to invest alongside Goldman Sachs and its employees."

Liz Hoffman contributed to this article.

Write to Peter Grant at peter.grant@wsj.com

(END) Dow Jones Newswires

July 31, 2019 02:47 ET (06:47 GMT)

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