Private equity markdowns put Goldman in the red

Goldman’s investing and lending portfolio, which includes around $16bn in private equity and real estate holdings, had negative net revenues of $2.48bn for the quarter.

Goldman Sachs’ disappointing third quarter losses of $428 million are due in large part to its private equity and debt holdings, according to the investment banking giant.

The bank’s investing and lending portfolio, which includes its private equity platform, suffered negative net revenues of $2.48 billion during the quarter, according to the firm’s earnings report. This includes a $1.05 billion markdown of its stake in Industrial and Commercial Bank of China, $1 billion in losses in other equity holdings and $907 million net losses in its debt securities business, which is dominated by mezzanine and senior debt funds.

The losses, which have not been realized, were partially offset by net revenues related to the firm’s consolidated entities held for investment purposes, said chief financial officer David Viniar in a conference call.

Goldman made its private equity investment in ICBC in 2006, purchasing 5.6 percent of China’s largest bank for $2.6 billion. According to reports, the bank’s share prices fell by 35 percent during the quarter. ICBC’s share price also played a role the last time Goldman ended a quarter in the red. Goldman was down $135 billion on its investment when it posted its first and largest quarterly loss, $532 million, in the first quarter of 2008.

The bank’s investing and lending portfolio controls around $60 billion in assets, of which around $16 billion is classified as private equity or private equity real estate holdings, said Morningstar analyst Michael Wong.

The bank’s private equity division is currently investing its sixth GS Capital Partners fund, which raised $20.3 billion in 2007. The fund typically targets investments between $50 million and $800 million in the Americas, Europe and Asia.

Goldman also attributed its third quarter losses on a general decline in M&A activity, which led to a 61 percent decline in underwriting advisory revenue compared to the third quarter of 2010, the bank said in a statement.

Private equity M&A activity, which is frequently underwritten by Goldman and other investment banks, has slowed by 11 percent this quarter, according to a recent M&A Trends & Insights Report from Thomson Reuters Governance, Risk & Compliance. Goldman secured $172 million in fees from buyout firms in the first nine months of 2011, more than any other bank, but a drop from the $236 million it collected in advisory fees over the same period last year.