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Term Sheet – Thursday, July 31

Goldman’s Private Equity Problem Is Getting Bigger

Hello, Erin Griffith here filling in while Dan is out. Contact me here: or here: @eringriffith

Today’s column is a guest post from my colleague Stephen Gandel.

The Volcker Rule may be causing Goldman Sachs to become greedy in the short-term as well.

The investment bank, which has long claimed to be focused on the long-term, beat Wall Street’s estimates in its second quarter. But those better-than-expected results came with a caveat. About $1.2 billion of the firm’s revenue, or nearly 15%, came from investment gains in the shares of private and public companies. That was $800 million more than a year before.

Goldman beat analyst estimates by $500 million. Without those equities gains, Goldman would not have beaten estimates. And Goldman will soon have to make do without those gains, much of which have come from its investments in private equity funds. PE funds, after all, are not Volcker-compliant.

Analysts and investors have known for a while that Goldman will eventually have to dump its private equity portfolio, which was valued at $8 billion at the end of the first quarter. On top of that, Goldman has another $2.4 billion in unfunded commitments, money it has pledged to private equity funds but has yet to contribute. It also has almost $5 billion in hedge funds and funds that invest in debt.

Under the Volcker Rule, big banks are not allowed to have more than 3% of their capital invested in private equity, hedge funds, and other investment funds. At Goldman, at the end of the third quarter, those investments equalled about 21%. So, the bank has a lot to sell.

It’s all a matter of timing. The Volcker Rule does not officially go into effect for another year. And Goldman can get an extension so it can hold on to some investments until 2017. So far, Goldman has been slowly selling its investments in hedge funds over the past three years, which are also not allowed under Volcker. But it’s mostly held onto its private equity portfolio. That may now be changing. When Goldman reports its official quarterly numbers to the SEC in the next week or so, a number of analysts expect to see a drop in its PE portfolio.

Goldman declined to comment for this article. In the past, the firm has given no firm timeline on the exit from its private equity positions. And the firm has said it will continue to manage private equity funds for outside investors. And it is reportedly looking for new ways to make private equity investments outside of specific funds. That might be a Volcker loophole. Still, the firm will have to exit much of its current private equity positions.

In theory, selling its PE investments shouldn’t affect its profits much. Goldman marks all of its investments to market, meaning that it takes any gains it has each quarter, not when it eventually sells. But if the bank ends up selling for more than it thinks its investments are worth, that difference would show up as a gain. That’s more likely to happen when Goldman exits the shares of private companies, because the value of those stakes are harder to estimate.

Goldman’s principal investment line on its balance sheet tends to be choppy, so it’s not unusual for it to jump around. And the second quarter’s earnings could have been a blimp. The $1.25 billion gain it registered from equity investments is the biggest it has had from that business in years.

The problem is those gains are coming at a time when earnings from Goldman’s traditional driver of profits—trading—has slumped, dragging down the firm’s overall profitability. Goldman’s return on equity in its most recent quarter was nearly 11%. Goldman’s ROE used to regularly top 20%. When the firm’s highly profitable private equity investment gains dry up, that ROE could drop even further.

But the bigger issue is determining what Goldman will do with the cash it gets after selling its positions. The lower ROE suggests that Goldman is having trouble finding places to put its cash that can generate higher returns. But that may not be a problem. Analyst Matthew Burnell of Wells Fargo says Goldman can give its cash back to shareholders if it can’t find high return investments for it. And the firm appears to be doing that. Burnell estimates that Goldman will pay out 85% of its earnings this year in dividends or buybacks to shareholders. That’s a much proportional pay out than what other large banks are doing, where payout ratios are averaging around 50%.

At the same time, handing money back to shareholders means that Goldman will have less capital to invest when Wall Street profitability does rebound. What’s more, all those payouts to shareholders doesn’t seem to be helping much. Shares of Goldman, which have been up recently, are basically flat for the year. Greed, no matter what Gordon Gecko says, doesn’t always work.

Find Stephen Gandel on Twitter here: @stephengandel.


Snapchat is reportedly in discussions with investors for a new round of funding that would value the Los Angeles-based app maker at $10 billion. Alibaba is said to be involved in the talks. The news was first reported by Bloomberg. Snapchat last Fall raised $50 million in Series C funding from Coatue Management at a valuation slightly below $2 billion.


Madwire Media, a Loveland, Colo.-based digital marketing agency, has raised $5.5 million in Series A funding from Copley Equity Partners and Cypress Growth Capital.

• Kixer, a native ad platform based in Toluca Lake, Calif., has raised $1 million in seed funding led by Lowercase Capital and TenOne Ten Ventures.

CivaTech Oncology, a Research Triangle Park-based developer of brachytherapy devices for cancer treatments, has raised $1.5 million in a new round of funding from undisclosed investors.

Axxess Pharma (OTC: AXXE), a Toronto-based based parent company of specialty health care products company AllStar Health Brands Inc., has raised $2 million in financing from Beaufort Capital Partners.

3rdKind, a Tokyo-based mobile game publisher, has raised $1 million in venture funding from Nippon Venture Capital, Global Brain and Adways.

Do, a San Francisco-based platform for running meetings, has raised $400,000 in seed funding from SherpaVentures and

Dstillery, a New York-based provider of audience targeting tools for brands, raised $24 million in Series C financing, led by NewSpring Capital with participation by existing shareholders U.S. Venture Partners, Menlo Ventures and Venrock. The company’s total funding is $48 million.

Thermalin Diabetes, a Boston and Cleveland, Ohio-based developer of insulin, has raised $5.8 million in funding from undisclosed investors as the first tranche of its Series B round of funding.

Bluegrass Vascular Technologies, a Lexington, Ken.-based developer of vascular access devices and methods, raised $4.5 million in Series A financing led by Targeted Technology Fund II.

•  GetYourGuide, a Berlin-based vacation booking site, has raised $25 million in Series B funding led by existing investors Spark Capital and Highland Capital Partners.

WheelRight Ltd, an Oxford, UK-based tire monitoring company, has raised £2.5 million from Calculus Capital.

•  Cold Genesys, Inc., a Newport Beach, Calif-based biopharmaceutical company developing oncolytic immunotherapies for cancer, raised Series A financing worth $13.57 million from Ally Bridge Group.

•  PagerDuty, a San Francisco-based IT management startup, has raised $27.2 million in a Series B round of funding led by Bessemer Venture Partners, with participation from existing investors Andreessen Horowitz and Baseline Metal.

•  Wevorce, a Bothell, Wash.-based provider of online divorce services, has raised $1.69 million from investors, according to an SEC filing. The round has room for $1.31 million more in funding.

•  RockYou, a games developer based in San Francisco, has raised $10 million in debt to buy declining games and monetize them.

•  Inventys Thermal Technologies, a provider of energy efficient technology for capturing post-combustion carbon dioxide, has raised financing from from Chevron Technology Ventures LLC, and Chrysalix Energy Venture Capital. Prior investors include Mitsui Global Investment and The Roda Group. The amount was not disclosed.

•  Entefy, Inc., a Palo Alto-based communications platform, has raised $5.25 million in venture funding from undisclosed investors.

•  Geekatoo, a Mountain View, Calif.-based provider of tech support, raised $1.7 million in venture funding from investors including 500 Startups, Wefunder, deNA, and angels.

•  Moogsoft, the provider of collaborative situation management for IT operations, raised $11.3 million in Series B funding led by Wing Venture Capital. Existing investors, including Redpoint Ventures, also participated.


Mergermarket Group, a London-based financial media company, has acquired The Law Report Group, a New York-based publisher of hedge fund and legal publications. Terms were not disclosed. Mergermarket is backed by BC Partners.

FleetServe, a Ponder, Texas-based provider of maintenance solutions for oilfield equipment and highway fleets, has sold a minority stake to Pummerin Investments. Terms were not disclosed.

CCMP Capital Advisors has agreed to acquire the Eco Services business unit of Solvay (Euronext: SOLB), a chemical company based in Cranbury, N.J., for $890 million.

Templar Energy LLC, an Oklahoma City-based oil and gas exploration company, will acquire the of Granite Wash assets Newfield Exploration Company (NYSE: NFX) for $588 million. Templar Energy is backed by Trilantic Capital Partners and First Reserve Corp.

Tamarind Energy, a Kuala Lumpur-based exploration and production company, has signed a $800 million capital commitment from Blackstone Energy Partners.

John Hardy, a luxury jewelry maker, has sold to Catterton, for an undisclosed amount.

Le Gaga Holdings Limited (NASDAQ: GAGA), a hong Kong-based greenhouse vegetable producer, has agreed to be taken private by Harvest Parent Limited, for $0.0812 per ordinary share or US$4.06 per American Depositary Share, representing a 21.56% premium over the closing price of US$3.34.

Black Rhino Group, a Johannesburg-based infrastructure development company, has agreed to investment of undisclosed size from Blackstone Group.

XIFIN, Inc., a San Diego-based provider of software and services to diagnostic service providers, has sold to GTCR.

Norbert Dentressangle, a Lyon, France-based logistics and transport company has agreed to sell itself to Jacobson Companies from Oak Hill Capital Partners for $750 million.

Commercial Foodservice Repair, a Greenville, S.C.-based provider of foodservice equipment maintenance and repair services, has taken an investment from Leeds Novamark Capital in support of the company’s acquisition of Foodservice Technologies, an Alexandria, Va.-based foodservice, refrigeration, HVAC, plumbing and electrical repair and maintenance service provider doing business as Tech 24.


Armacell, a German insulation firm acquired by Charterhouse Capital Partners for at least EUR 500 million in 2013, has chosen Deutsche Bank and Bank of America, supported by BNP, to run its IPO, Reuters reported.

Catalent, a Somerset, N.J.-based biotech company, began trading on NYSE under the ticker symbol CTLT today. The company will raise $871.3 million in an offering that values it at $2.4 billion. Blackstone Group acquired 86.3% of the company’s shares and will keep a majority ownership after the offering. Read more at


Frontage Laboratories, Inc., an Exton, Penn.-based provider of outsource clinical development services in China and Asia Pacific, has been acquired by Hangzhou Tigermed Consulting Co. Frontage was a portfolio company of Baird Capital. Terms were not disclosed.

Envision Pharmaceutical Services, a Twinsburg, Ohio-based pharmacy benefit management company, has agreed to acquire MedTrak Services, L.L.C. an independent, privately-held pharmacy benefit management company. Envision is a portfolio company of TPG. Terms of the transaction were not disclosed.

Gyft, a Redwood City-based virtual gift card startup, has sold to First Data Corporation. Gyft had raised $7.5 million in venture funding from Karlin Ventures, Google Ventures, A-Grade Investments, Canyon Creek Capital, Haystack, The Social+Capital Partnership, David Sacks and Haas Portman.

Nordstrom (NYSE: JWN) has acquired Trunk Club, a Chicago-based men’s shopping site. Trunk Club had raised a $12 million Series A funding from U.S. Venture Partners, Greycroft Partners, Apex Venture Partners and Anthos Capital, along with an undisclosed Series B round of funding in 2013. Terms of the deal were not disclosed.

Engine Group, a UK-based marketing services group owned by HIG Capital, has agreed to sell to Lake Capital for £100 million.

•  Propeller, a San Francisco-based provider of make-your-own-app tools, has sold to Palantir Technologies for an undisclosed amount of capital. Propeller was backed by $1.25 million in venture funding from Andreessen Horowirz, ffAngel, Menlo Ventures, Foundation Capital, Subtraction Capital, Great Oaks Venture Capital, Max Levchin, Ashton Kutcher, Keith Rabois, Scott Banister, Jason Portnoy, Lee Linden, Rothenberg Ventures and Alfred Mandel. Read more at

•  Sifteo, San Francisco-based maker of digital gaming cubes, has sold to 3D Robotics, a San Diego-based drone company, for an undisclosed amount. Sifteo had raised $16.5 million from True Ventures, Foundation Capital and Foundry Group. 3D Robotics is also backed by True Ventures and Foundry Group.


Volksbanke, an Austrian private equity group, has restructured, as mandated by the European Commission, selling a portfolio of funds worth EUR 110 million ($147 million).


Glu Mobile Inc. (NASDAQ:GLUU), mobile gaming company, agreed to acquire Cie Games, a Long Beach, Calif.-based gaming startup which publishes a game called Racing Rivals, for $100 million, $30 million of which will be paid in cash.

Icebergs, a Barcelona-based “Pinterest for creative types,” has sold to Pinterest for an undisclosed amount. The company had not raised venture funding.


Ross Posner has exited Allstate Investments, where he acted as group head of its global infrastructure and real assets program.