Goldman Sachs’ Somaiya: Growth equity ‘was peak frenzy’ last year

Goldman Sachs Asset Management held the final close on its inaugural fund dedicated to growth equity investing this week.

The firm wrapped up fundraising on $5.2 billion for West Street Global Growth Partners I, exceeding its initial target of between $3 billion and $5 billion.

The firm gathered $3.7 billion for the vehicle from both institutional and high-net-worth investors, while the remainder came from Goldman Sachs and its employees, according to a statement.

Capital raised for the vehicle has been invested in minority stakes in early-to-mid-stage companies in four target sectors: enterprise technology, fintech, healthcare and consumer. The average investment size is about $50 million, according to the statement. About half of West Street Global Partners I has been deployed, including in Chinese life sciences robotics company MegaRobo, UK-based digital bank Starling and data security platform Fortanix.

The vehicle is one of the largest first-time funds for growth investing, alongside Blackstone Growth, which closed on $4.6 billion in 2021. Funds dedicated to growth equity gathered $93.5 billion in 2022, or about 13 percent of total capital raised during the year, according to Private Equity International‘s preliminary full-year figures.

PEI caught up with GSAM’s co-head of growth equity Nishi Somaiya to ask about the firm’s capital-raising efforts for the strategy and how it plans to put capital to work in a tougher macro environment.

You raised your debut fund at time when investors were flocking to growth equity. What was that experience like?

It was peak frenzy last year in the growth equity market in terms of capital available, capital being raised, velocity of dealmaking, valuations – every metric you looked at there was a new record being set. The positive for us fundraising in this market is that there was an excitement about the asset class, about the innovation and adoption happening in the tech landscape, and as a result, prospective investors and LPs wanted to hear our story.

We were very fortunate that we got the opportunity to share our 20 years of growth investing experience with many investors who were interested to learn about our track record, our USP, our investing philosophy.

The flip side of that was that it was inevitable that comparisons were made with existing managers, many of whom were raising at a similar time. In many cases they were re-ups to subsequent funds, and in some cases our rhetoric didn’t resonate with people or they wanted validation of our approach through fund one before committing to us. Nonetheless, we are obviously delighted with the outcome and very thankful to those LPs who came into the strategy with us.

How are you assessing deals in this space?

It’s critically important to understand that for us we view these investments as a journey. Our average hold historically has been about six years – in light of that, you want to be really sure about the product market fit, the sustainability of unit economics, the total addressable market, business practices, what’s good, what can be great, and what needs supplementing which is where we can help.

This takes time and our diligence process is thorough. We talk to customers, we utilise our engineers to help assess the quality of the tech stack, we spend time understanding how the business operates. Getting to know management is an integral part of this process as it’s so important to know the people we are working with. It’s a long journey and we need to know our partners – we made it a point during covid to invest in management teams that we had met previously physically.

Away from financial metrics and spending time with management, we also focus on assessing regulatory and reputational risks. As a large regulated international institution ourselves we are fortunate to have a strong constituent of individuals in the firm who can help us assess these risks but importantly help our companies build the right practices and procedures to mitigate them

Finally we also think about what we can bring to the table beyond just capital. We are fortunate to have several world class operators working with us in our Value Accelerator platform – we want to be impactful in the scale up journey of these companies and bring the full network and resources of the Goldman Sachs franchise to help drive value creation be it with customer introductions to C level relationships we have in our banking franchise, talent acquisition, go to market strategy, procurement, leveraging our IPO capabilities, and so on.

Has recent global economic activity changed the deal landscape?

The whole market has slowed down. Everyone wants to see how companies continue to perform through what is a more challenging macroeconomic environment and to understand where valuations may finally settle.

Processes are taking longer, there is more time for diligence, and there is definitely more governance that has come back into documents. At the peak, we were seeing all sorts of terms being eroded. But now you’re back to a world where you have a more robust minority rights package – anti-dilution and layering provisions, minimum returns… [It’s] definitely a massive shift.

We’re also seeing several companies that need capital [exploring] more structured solutions to bridge the valuation gap. More hybrid equity-debt type instruments that have embedded downside protection and minimum return features, whether that’s in the form of 1.5x times liquidation preference, or a coupon, or hard exit rights.

The secondaries market is also becoming a little more active and may create interesting valuation entry points into several companies. The need for liquidity by earlier-stage VCs or angel investors who were hoping for liquidity events in 2022 or 2023 is starting to create some pressure points in capital structures.

That’s an interesting way to enter some great businesses and perhaps creates a path to invest more primary capital further down the road, once you’ve had a chance to see how the company continues to perform.

What are the near-term priorities for the growth equity team?

Our key critical focus is first and foremost to support our existing portfolio companies through what is a more challenging period, the first time for many experiencing a difficult macro backdrop.

Second, leveraging our value creation capabilities in all of our investments to the fullest.

Third is continuing to think about ways to deepen and grow our platform either in new sectors of innovation or places. For example, we have been spending quite a bit of time in Israel, which is a hub of innovation and extremely important in the tech ecosystem. We want to leverage our strong investment banking presence there to further our equity investing franchise in the region locally.

To access more Goldman Sachs insights, analysis and data, click here