Goldman Sachs stands to earn money from multiple sources over the life of its $375m investment in Facebook thanks to an artfully structured deal likely to reignite controversy over the way banks invest their own funds.
Goldman’s deal highlights how banks are searching for high-return deals as tough regulations and uncertain markets deprive them of many of the lucrative trading products of the pre-crisis boom.
However, Goldman’s purchase of a stake of less than 1 per cent in privately held Facebook will come into focus this month as US regulators decide how to implement the “Volcker rule” aimed at curbing banks’ investments with their own funds.
The cash injection revealed on Monday is part of a $2bn fundraising that values Facebook at $50bn – a high valuation for a company with an estimated $2bn in annual revenues.
Goldman declined to comment on the investment. People involved in the deal, however, said it would allow Goldman to start earning a return on its investment long before it sells its stake. The first source of income will be the millions of dollars in fees Goldman will charge Facebook and the wealthy private clients who want to participate in a $1.5bn fund that will buy shares in the social network at the same $50bn valuation.
Insiders said Goldman’s customers have to commit to buy at least $2m worth of Facebook shares, although final allocations will be much smaller because of high demand.
Goldman may also charge fees to manage the fund, to be structured as a special purpose vehicle in an effort to comply with US rules requiring companies with more than 500 investors to make more regulatory disclosures. Goldman, too, could make tens of millions of dollars if it is chosen to underwrite Facebook’s initial public offering, which could come next year. Bankers cautioned that the investment was not a guarantee of an IPO mandate and rival Wall Street firms would mount a campaign to land the deal.
Goldman’s biggest return is likely to come from the eventual sale of its Facebook stake.
Congressional aides said the Facebook investment should be a test case for regulators as they flesh out the Volcker rule – part of last year’s Dodd-Frank financial legislation.
Simon Johnson, a professor at the Massachusetts Institute of Technology, said it was “incomprehensible” that the deal was likely to escape the rules simply because it was not a short-term trading position and it was funded directly from Goldman’s balance sheet. “Are we saying that investing in internet companies is less risky than proprietary trading? They could go to zero – see the internet bubble for details,” he said.
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