The bulge-bracket investment banks are already in the throes of Goldman Sachs envy, as evidenced by the reincarnation of several Goldman-style merchant banking models on Wall Street. Now, if a new Goldman fund placement business starts poaching choice assignments, the envy may harden into smoldering resentment.
So soon after casting into outer darkness their own merchant banking operations, Citi and Morgan Stanley, to name two, have suddenly re-embraced business models that look suspiciously like Goldman's Principal Investment Area, which houses its private equity, venture, infrastructure, mezzanine debt and real estate investment teams.
After years spent rebuffing all demands that it spin out or downsize its in-house private equity investment platform, Goldman is now arriving fashionably late to the placement agent party – this is a business that other bulge-brackets have plied successfully for years, and that has been notably absent from the Goldman line-up of advisory services.
According to sources close to the firm, Goldman is building a team internally that will constitute its idiosyncratic version of a placement agency. Lest any other banks take this move to be imitation, and therefore flattery, consider the details: Rather than creating a separate placement entity within the investment bank, Goldman is designating professionals from across different teams, including the financial sponsors group, the leveraged finance group and the securities group, who will contribute to select fundraising assignments where Goldman believes it can “get paid selectively and paid well”, as one person puts it.
A Goldman Sachs spokesperson declined to comment on this.
Goldman already has proven its prowess at pulling together enormous amounts of capital commitments for its own funds, including the recent $20.3 billion GS Capital Partners VI vehicle. One investor relations professional, not a Goldman employee, said he saw the new placement effort as “Goldman monetising its relationships for other people”.
The fundraising business may hold another attraction for Goldman in that it allows the firm to better capture some economics when superstars depart to set up their own funds. The most recent example of this is the Hopu Fund, a new China-focused private equity firm led by former Goldman investment bankers Fang Fenglei and Richard Ong (see also Asia Monitor, page 34). Goldman reportedly will invest $300 million in the fund. And while it is unclear whether Goldman will also help raise the vehicle, such a service would make sense for both parties.
So long as allocations to private equity continue to grow, the siren song of owning one's own fund will prove too enticing for even the most contented and well compensated Goldman stars to resist, and as has been well proven, “ex-Goldman” goes over well on the fund-marketing trail. Think of this phenomenon as proprietary deal flow for the new Goldman placement unit. Keep in mind, too, that placement fees on new funds are much higher than on follow-on funds where LPs and GPs have established relationships. As the placement business gets even more competitive, coming across a Silver Lake-like new private equity group (i.e. a highly pedigreed assembly of GPs that draws huge investor enthusiasm) is like finding manna from fee heaven.
A more skeptical view of the new Goldman placement group is that it allows the firm to make hay in the fundraising sunshine now that a big part of the deal market has gone dark. Goldman's investment bank looks set to remain champion of the upper end of the deal market, but deal sizes have come down and, in general, become fewer and further in between. That means fees have come down as well. In the meantime, demand for private equity and other alternative investment funds has surged around the world. What better use for an under-utilised investment banker than to get involved in blow-out fundraising?
Critics will claim that Goldman is going to have a hard time managing the conflicts that come from selling its own funds and external funds at the same time. But managing conflicts is what the firm excels at, as evidenced by its dominant investment banking and principal investment teams under the same roof. You can bet that the global LP base has an appetite for Goldman-branded funds as well as for funds delivered on Goldman's silver platter.