Goldman Sachs Thinks You Private Equity Suckers Are Chopped Liver

Why not start a private equity division amid a record glut in dry powder?
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Ever since Goldman's trading desks lost that loving feeling, the bank has followed the desperately-trying-to-salvage-a-crumbling-marriage playbook with its investors. Seemingly every week we learn of some new way the bank is going to spice things up and make it all better: Goldman will finance home-flippers and sell thought leadership and possibly (god forbid) trade bitcoin. Eventually Goldman might learn to cook and maybe like join shareholders at their yoga classes if that makes them happy?

Goldman.JustAddButter

But there's evidently still more in the pipeline; now we can add “do private equity” to the spaghetti hanging on Goldman's brainstorming wall:

Goldman’s investment bank, which typically focuses on advising large companies on mergers and raising capital, is now looking to use Goldman’s own funds to finance a handful of small, promising companies in the near-term, the people said. The initiative is led by senior investment banker Kathy Elsesser, who earlier this year took on the project in addition to her role as global chair of consumer, retail and healthcare investment banking.

The move makes intuitive sense for a few reasons. It fits into the general idea behind Goldman's expanded efforts to share business ideas (and clients) between the investment bank and trading desks. Goldman has eyes and ears all over the market through both its trading and investment banking; the insights it can glean from all these diverse vantage points gives the bank an informational leg up over traditional private equity firms.

Plus Goldman already does plenty of merchant banking and speculative lending, which occasionally sparks gigantic swings in the Investing & Lending section of the bank's quarterly earnings. This makes launching a new private equity effort more natural than, say, Marcus. So says this guy:

“Part of Goldman’s core business is its ability to take equity stakes in companies they’re working with,” said Marty Mosby, an analyst with Vining Sparks. “It may create more volatile outcomes, but ultimately it’s more within their competency than other businesses they’re trying to get into.”

But it's still an inauspicious – and possibly a little audacious – time for Goldman to go rooting around for excess returns in private equity. At the moment, there's something like $1.5 trillion sitting around in PE coffers globally, all of it jostling for the same limited and dwindling pool of investable assets. And there won't be much relief anytime soon. According to Pitchbook, as much as 80 percent of the capital handed to PE firms in 2015 remains fallow. Meanwhile, Q3 2017 saw the second-highest total of PE fundraising since 2008.

Add to this competition the absurdly profligate SoftBank and increasingly undiscriminating Saudi wealth fund, who with others seem intent on pushing every halfway-promising startup valuation from “somewhat elevated” to “YGBFKM,” and Goldman's private equity push seems like a potentially steep climb.

Still, Goldman's plans are evidently beginning on the modest side. It's not going to be in the same bind as overstuffed PE giants or floundering sovereign wealth funds who need gigantic deals to relieve them of their bulging cash positions. As Reuters reports, the deals will aim for the tens of millions, and they're not going after WeWork and Uber anymore:

The latest effort, however, would target industries outside of Silicon Valley, said the people, who declined to be named because the strategy they were discussing was not yet public... Under the leadership of co-heads Gregg Lemkau, Marc Nachmann and John Waldron, the business has strengthened its presence in cities such as Atlanta and Dallas, hired more senior dealmakers from Wall Street rivals, created a new team to pitch innovative ideas to big clients, and invested in technology.

It could just work! Though who knows if we mortals will ever get a peek at the returns, other than a vague wave at the Investing & Lending line item.

Goldman plans private equity expansion to help offset trading funk [Reuters]

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