What type of revenues, profits and growth justify a $50 billion valuation for a very young, private company with sparse net cash flows? The type that are marketed by those who are doing God’s work! now, let’s build on Mr. Howlett’s and Dignan’s ideas the BoomBustBlog way. We shall begin with the $1.5 billion dollar fund that Mr. Howlett alleges GS is creating around the Facebook cash injection. Yesterday’s BoomBustBlog rticle, Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private! clearly detailed why and how many of these private equity and client funds routinely gut investors (we’re talking up to 92% in losses!) while Goldman (and other GPs) still walk away with profits (see Even With Clawbacks, the House Always Wins in Private Equity Funds). I have posted the model that illustrates this bank wins, investor loses phenomenon as a live spreadsheet online for all paying BoomBustBlog subscribers to use at will. It’s quite the comprehensive model and allows for the user to run a myriad of their own assumptions using any inputs they please. As subscribers will see, it is nearly impossible for Goldman to lose money on their Facebook private fund, no matter how badly Facebook shares perform. Please beware that is unlocked and fairly complex, so please do not make any formulae changes to it for it corrupts the experience for other users. Here is an excerpt for those who do subscribe to our research and services, YET!
Even with the fund taking 45%+ losses and the LP (limited partners, ex. Goldman’s clients) losing every last single dime, Goldman easily pulls a 33% return. God forbid Facebook share actually do well, Goldman’s numbers look… Well… Damn near illegal! Almost as if they can pump up a price without any fundamental justification or public disclosure of financials and still sell it retail to the public. Of course, such a thing could and would never occur – not with the every vigilant SEC to take our backs. Excuse me while a cough a up a lung from laughter…
I feel your pain, Mr. Clark. Back to the Bloomberg article...
Clark isn’t the only investor unhappy with Goldman Sachs Asset Management. GSAM (often pronounced gee-sam) managed most of the $840 billion in assets Goldman oversaw in December, a figure that dwarfs the money managed by brand-name firms such as Legg Mason Inc. and Franklin Resources Inc. Yet the evidence shows that the behemoth inside the 141-year-old investment bank is generating subpar returns for investors and is a persistent headache for Chairman and Chief Executive Officer Lloyd Blankfein.
Again, go through Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? and review the evidence presented therein. Here is one quick example of many...
Reggie vs Goldman Sachs
Why didn’t Wall Street read my post on Lehman being a yellow lying lemon? See “Is Lehman really a lemming in disguise?” and realize that this post was made on February 20th, when Goldman Sachs had a recommended price of about $55 while this blog warned that Lehman may be done for. This very similar to when I warned about the potential demise of Bear Stearns in January, when the rest of the Street had a “buy” at about $130 per share. See Is this the Breaking of the Bear?. 7 We all know how both of these stories ended. Please click the graph to enlarge to print quality size.
If you look into my original post on performance (see “Performance!“), you can see when I recommended strong shorts on Morgan Stanley and Goldman Sachs, both highly contrarian views at the beginning of the year, and both returned way over 100% and in the case of Goldman, is still pushing profits.
Back to the Bloomberg piece:
In March 2008, Peter Kraus, co-head of the investment division that oversaw GSAM, resigned after incentive fees -- the 20 percent that hedge and other funds slice off profits -- plunged 81 percent in fiscal 2007 and Global Alpha lost 40 percent, according to investors.
Co-head Ed Forst took over. He was one of a cadre of Blankfein confidantes known as Lloyd’s Boys, according to former employees. Forst, now 50, left after three months to take a job at Harvard University, and investment management became the job of Marc Spilker, a former co-head of U.S. equities, and Timothy O’Neill, a former senior strategist.
They were the seventh and eighth Goldman investment heads in eight years.
...O’Neill and Spilker didn’t do much better than Kraus, now 58. The division’s 2009 net revenue of $3.97 billion accounted for about 8.8 percent of Goldman’s total revenue and was down 12.8 percent from fiscal 2008 as both management and incentive fees declined.
A big chunk of GSAM’s assets are its separate accounts -- pools of money invested for institutions and wealthy individuals. EVestment Alliance LLC, an Atlanta-based research firm, tracks about $300 billion held in the accounts and finds that Goldman trailed its peers in 73.8 percent of the categories EVestment looked at during the five years ended on Sept. 30. Chicago-based financial publisher Morningstar Inc. tracks Goldman mutual funds and found that the 338 fund share classes it looks at trailed the average return of their respective peers in every broad category, including U.S. diversified equity, non- U.S. stock and taxable bonds, over the 3-, 5- and 10-year periods ended on Dec. 31. Yet investors have not only stuck with GSAM; they’ve added tens of billions of dollars to its assets since 2000.
Goldman is able to attract so many billions of dollars on top of such subpar performance because it is the best in the financial game at marketing. I explained this in detail in "For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks"Tuesday, February 23rd, 2010 and Let’s Have a Conversation About Brand Names, Finance and Investing Thursday, November 19th, 2009. Anybody who has any doubts that Goldman markets better than they advise their clients best take the time to thoroughly review these two links!
Bloomberg goes on to elaborate:
Marketing Muscle’ ... “Given the golden reputation of Goldman, it’s amazing,” says Anton Schutz, founder of Rochester, New York-based Mendon Capital Advisors Corp., an asset management firm that specializes in financial stocks and doesn’t own Goldman Sachs shares. “What we thought was investing acumen has turned out to be a tribute to the firm’s marketing muscle.”
The sales prowess of the Goldman franchise lost some of its luster in the deal for Facebook, run by 26-year-old Mark Zuckerberg. Goldman had planned to sell as much as $1.5 billion of the Palo Alto-based company’s stock to clients through a GSAM-affiliated fund known as a special-purpose vehicle.
Instead, Goldman on Jan. 17 halted its offering to U.S. investors due to the copious press the deal garnered.
“Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law,” the firm said. Securities laws forbid investment firms from advertising such offerings to the general public.
And I was forced to ponder, Did Blogs Exercise Enough Influence To Alter Goldman’s Facebook Plans Or Did The SEC Decide To Get Serious?
2012 Facebook IPO... Analyst Josh Bernoff of Forrester Research Inc. in Cambridge, Massachusetts, expects a Facebook initial public offering in 2012. Bundling Facebook shares into a GSAM special-purpose vehicle might have helped Facebook avoid a U.S. Securities and Exchange Commission requirement that any company with more than 499 investors meet SEC financial reporting requirements. Such moves are a common practice in the venture capital industry. Goldman and the funds it manages, including GSAM hedge fund Goldman Sachs Investment Partners, invested $450 million in Facebook before the bank began recruiting investors. Digital Sky Technologies, a Russian investment firm, bought $50 million. On Jan. 21, Facebook announced that Goldman had completed an over-subscribed offering to its non-U.S. clients for a fund that invested $1 billion in Facebook Class A shares.
The fact that Goldman's offering was so oversubscribed is a testimony to the market prowess of Goldman over the viability and prudence of its investment advice. Those shares were priced for bonus pool expansion, not investor performance. From "Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!"and to wit:
To put the amount of optimism used in our analysis in perspective, there are 6,892,839,222 people in the world according to the US Census Bureau’s World Clock. Facebook currently claims 9% of that world population. Take into consideration a material percentage of that population are elderly or very young, infirm, illiterate, poverty stricken or located in remote rural areas and do not have iPhones and Androids, broadband connected computers and Facebook accounts, and may not have these things for some time, if ever. For the extremely optimistic benefit of the doubt, let’s assume that all children down to the age of infancy, the infirm, the illiterate and the Australian outback settlers all are frequent or likely Facebook users. Even with this assumption, Facebook will have to hit 65% of today’s total (as in the ENTIRE) world population (not factoring in population growth/shrinkage) by c.2020 to justify anything approaching a $50B valuation – and that’s assuming they captured 65% of every single man, woman and child in the world along the way – not 65% of those who have access to an internet connected computer.
Thus, it is highly unlikely one can legitimately factor in the type of growth needed to justify the current Goldman $50B valuation – particularly when you consider that Facebook’s growth is already slowing!
More from Bloomberg:
Goldman is still dealing with the fallout from its last run-in with the SEC. In April 2010, the commission filed a civil suit accusing Goldman of fraud for selling a mortgage-related security called Abacus 2007-AC1 to clients without disclosing that bearish hedge fund Paulson & Co. helped pick some of the securities linked to it -- with the intention of selling the security short... Goldman settled the suit in July, agreeing to pay $550 million, a record for a Wall Street firm, without admitting or denying wrongdoing....
“Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities,” said Senator Carl Levin, the Michigan Democrat who chaired the subcommittee.
... Blankfein told the Levin hearing that as a market maker Goldman had no obligation to tell clients about Goldman’s own positions in the securities it was selling.
... Clients “are buying an exposure,” Blankfein told the committee. “The thing we are selling to them is supposed to give them the risk they want.”
Clark was particularly irked by the disclosures surrounding Abacus. He had met with Paulson & Co. founder John Paulson in August, 2006 and been impressed by the hedge fund manager’s plans to bet against the subprime-mortgage market. His Goldman brokers talked him out of investing with Paulson, describing him as a bit player, Clark says. Paulson generated a 590 percent return in his flagship credit fund in 2007.
‘These Jerks’... “When it came out that Paulson had the biggest payday in history, I got angry,” Clark says. The fact that Goldman Sachs had such a close relationship with Paulson incensed Clark further. “They just butter their own bread and charge huge fees, these jerks,” Clark says.
...Sickly Mutual FundsAccording to Morningstar, just 44.9 percent of Goldman’s U.S. diversified stock funds managed to beat their peer average over the three years ended on Dec. 31. Just 34.7 percent of such funds beat their peer average over 5 years and 28.3 percent over 10 years.
Only 11.5 percent of Goldman’s foreign stock funds beat their peer average over 3 years, 6.7 percent over 5 years and zero percent over 10 years. Similar stories play out in both the taxable and municipal bond categories.
...“With just a few exceptions, these funds are chronic underperformers,” Morningstar mutual fund analyst Karin Anderson says.
... As for Goldman separate accounts, EVestment looked at narrower categories -- such as U.S. core high-quality fixed income and Japan small-cap equity -- and found Goldman Sachs trailing more than two-thirds of its rivals over the 3-, 5- and 10-year periods.
... Another possible culprit in GSAM’s underperformance is expenses. Goldman’s diversified U.S. equity funds sport an asset-weighted average expense ratio of 1.02 percent versus an average of 0.79 percent for the U.S. diversified mutual fund universe as a whole.
... Bove says GSAM may also be putting an undue emphasis on marketing. “It could be that the focus of an asset manager within a brokerage is more sales oriented than performance oriented,” he says.
So why do investors keep their accounts at the New York firm? The prestige of the Goldman Sachs name is a big factor.
The Power of a Name
“A lot of wealthy clients like to say, ‘I have my account at Goldman, blah, blah, blah,’” says Michelle Clayman, founder of New Amsterdam Partners LLC, an investment manager that owned 267,235 Goldman shares as of Sept. 30.
“I concluded that I don’t need these hedge funds and I don’t want these Goldman Sachs managers,” he [Jim Clark] says. In 2009, Clark moved almost all of his money to Morgan Stanley.
More Reggie Middleton on Goldman Sachs:
- The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again! Friday, January 14th, 2011
- Reggie Middleton Takes The Challenge To Goldman Sach’s Apple Proclamation One Step Farther, Apple’s Closed System Risks Failure! Wednesday, December 15th, 2010
- The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again! Friday, January 14th, 2011
- Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past?
- What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone… Monday, August 9th, 2010