Musings on Goldman’s Reallocation Plan

Yesterday’s big private equity news was that GS Capital Partners, the PE arm of Goldman Sachs, wants to reallocate half of its remaining dry powder toward stressed and distressed debt opportunities (mostly debt). There is around $9 billion left in the firm’s six fund – of an original $20 billion stash – so we’re talking real money here. Three quick thoughts:

1. To me, this is Goldman’s way of saying that it wants to participate in Treasury’s public/private partnership plan. And it wants to participate on Day 1. Why else would it want to tap existing capital (a relatively fast process), rather than just go raise a dedicated distressed debt vehicle (a relatively long process)?

2. Goldman is also saying something else: It disagrees with the PE titans who keep gushing that a plethora of fantastic buying opportunities are just around the corner. If Goldman thought that it could make huge money from LBOs over the next two years, it wouldn’t be looking to halve its LBO capital.

3. Just because Goldman wants to do this doesn’t mean that it will be able to. It needs majority consent from its limited partners – many of whom will need serious convincing. Moreover, that 50% mark is particularly steep for GS Capital Partners. Approximately 40% of its capital comes from Goldman itself (employees, clients, etc.), but Erin learned yesterday that the fund documents preclude Goldman from voting on the proposed amendment.