Goldman Sachs heads to private equity's consignment shop
Goldman Sachs (GS) is looking for private equity bargains. The giant Wall Street firm is launching a $5.5 billion fund to buy stakes in private equity funds from investors who can't wait any longer to turn them into cash.
It's a move well suited to these credit-constrained times. Private equity funds aren't like bank accounts; investors can't just make a withdrawal when they need to pay the bills. And some institutional investors like pensions and endowments can only invest a limited portion of their capital in private equity. With the value of their other investments falling, they're finding that they need to sell now even if they'd prefer not to. With its new fund, Goldman Sachs plans to buy up these unwanted stakes in PE funds.
Private equity funds haven't been making many new investments, which is making this kind of consignment shopping more attractive.
Heavily reliant on borrowing to finance their purchases, private equity funds have been hit especially hard by the financial crisis. They've made just $22.2 billion in investments so far this year, down 74 percent compared with the same period in 2008, according to Thomson Reuters.
In turn, they're raising less new money from investors -- 81 percent less than last year, according to Dow Jones' Private Equity Wire. For those interested in putting their money with a PE fund, vehicles like Goldman Sachs' may offer that opportunity when it wouldn't otherwise be available.
As much as nine percent of stakes in private equity funds could be sold to so-called "secondary" buyers like Goldman Sachs' fund in the coming years, according to consulting firm Preqin (via Bloomberg News). That's a small slice of a $2.5 trillion pie, but certainly big enough to make Goldman a lot of money.