Private Equity - Goldman Sachs' Recent News
The Dynamic Wealth Report
April 13, 2009
Did You See What Goldman Sachs Did?
If you spend enough time on Wall Street, you learn that there are two
types of investors. Smart money, and dumb money. The smart money is
always ringing the cash register and pocketing millions of dollars. The
dumb money… well… they’re not.
There’s a little known third group of investors who don’t fit in either
category.
They’re not dumb, but they realize they’re not smart either. (Who said
self awareness wasn’t good?) So, they do the next most logical thing…
they follow the smart money. They invest only where the smart money
invests.
The hardest part about that strategy is figuring out where the smart
money is investing.
Every so often we get a glimpse. Today, we got such a glimpse at what
some of the smartest on Wall Street are thinking. Think of it… being
able to invest alongside some of the smartest investors in the world.
What happened?
Goldman Sachs (GS) announced they’d raised $5.5 billion for a new
investment fund. The fund is called GS Vintage Fund V. It’s a dedicated
private equity secondaries fund.
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Ok, two questions… Why follow Goldman? And what’s a secondaries
fund?
First, Goldman. The name should send shivers up your spine. When I was in
banking, we used to joke that their business cards landed with a thud…
while ours just floated. They carried more weight in the banking world
than any other firm out there.
The entire firm is filled with the best and brightest and they all know
how to make money.
Think about recent history… Goldman was smart enough to get into
mortgage backed securities, sub-prime loans, and CDOs as the industry
was getting hot (they made lots of money). Then they were smart enough
to see the bubble and get out. They even shorted parts of the industry
before it peaked (which made them even more money). I don’t know about
you, but that’s a pretty smart move in my book.
Think of all the money you could have made by following their moves.
Clearly, Goldman is one of the “smart money” investors.
So, what’s this secondaries fund they just established?
A secondaries fund is a pool of money set up to buy out other
investments in private equity funds. I know it sounds complicated…
but think of it this way.
If you’re a giant pension fund, insurance company, or college endowment,
you need to invest your assets. One big way to invest is through private
equity. Think of big investment funds like KKR, Blackrock, and The
Carlyle Group.
Here’s the catch… when you hand these private equity managers your
money, they require you to leave it there for 7 to 10 years or more! These investments aren’t like stocks. You can’t trade in and out of them
every day. If you need to sell your investment for some reason, you need
to find someone to buy it.
Normally, when a long term investor needs to exit a private equity
investment there’s a reason… like they need cash. Because of that the
buyer gets to dictate the terms of the deal and write his own check! Nice work if you can get it.
It’s a lot like the real estate market today. If you have a big wad of
cash and want to buy a bank owned house, you can name your price. Same
thing for Goldman with the secondaries fund… If somebody needs to sell,
Goldman will be happy to buy… at forty, fifty, or sixty cents on the
dollar. (I told you these Goldman guys were smart.)
Plus, they only buy when the underlying investments look good.
Remember, private equity takes investment dollars and buys companies…
they often make them more efficient and then look to resell them for big
profits. So before Goldman will buy, they’ll look at the underlying
investment… if they like what they see, it’s a chance for them to make
even more money.
So how can we make money off this?
Unless you happen to have a few hundred million in cash lying around,
buying secondaries directly is going to be a bit difficult. Ok…
impossible.
But Goldman is shining a light on one part of the market that deserves a
second look.
The asset managers.
Think about it. The investments many of these private equity funds have
made are in solid companies. That means when prices return to normal,
buyers will see these investments pop in value.
But let’s peel back the onion one layer more.
The asset managers also benefit when the underlying investment does
well. So the big score for guys like KKR and Blackstone comes when they
make big money for their investors. Right now, these funds are being
shoved into the wood chipper with the rest of the market. Just look at
the charts on The Blackstone Group (BX), and Och-Ziff Capital Management
Group
(OZM).
As the market rebounds, so will their investments… and that means big
returns for the money managers. And don’t forget Goldman in all of this. If they’re right, they stand to profit handsomely. Take a look at these
asset managers… especially Blackstone. I can see them driving big gains
in the next few months and years as the market recovers.
• Auto Parts Index (Up 57%)
The auto industry has rebounded over the last few weeks despite posting
horrible industrywide sales numbers. Benefiting from this rally are the
auto parts companies… those supplying the major auto manufacturers. The
government guarantee program seems to be helping and stocks are up.
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