Goldman plans private equity expansion to help offset trading funk

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Goldman Sachs Group Inc is ramping up its private-equity investments and going after smaller, high-growth targets as part of a broad plan to offset recent trading declines, three people familiar with the effort told Reuters.

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 team scouting for deals 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 goal is to repeat Goldman’s past success with early-stage investments in tech companies such as Uber Technologies Inc. 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.

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It is one of several initiatives Goldman has launched to add five billion US dollars to annual revenue after a slump in bond trading. Among those are efforts to lend more, come up with creative deals to pitch to big clients, and convince more corporations and investors to trade with Goldman Sachs.

The private-equity plan may not be a slam dunk. Investments could be duds, especially because fierce competition has made it more difficult to produce strong returns from private equity. Bankers will also have to be careful not to anger Goldman’s investor clients chasing the same deals.

Even a successful effort is unlikely to make up for the billions of dollars’ of trading revenue Goldman has lost since 2009, analysts said.

“They’ve admitted there is a potential problem long-term with revenue growth so they need to do something about it,” said Brian Kleinhanzl, a bank analyst with Keefe, Bruyette & Woods. “But it’s rare for things to move the needle too much with Goldman.”

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Those involved with the strategy characterized it as one of many ways Goldman is trying to use its own capital to boost returns, even if it is on a small scale.

It is unclear how much capital Goldman will ultimately devote to the effort, but individual investments will be in the tens of millions of dollars, people familiar with the plan said. The capital will come from the investment bank’s allocated balance sheet, they said.

Goldman has been reducing its own investments in those funds due to the Volcker rule, which was implemented after the 2007-2009 financial crisis to prevent banks from making big market bets with their own capital. The rule limits commitments to private-equity funds, but not how much banks can invest directly in individual companies through loans or merchant banking-style equity deals.

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Source(s): Reuters