Thursday, 06 January 2011 11:31

The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman's Facebook Fund Marketing Brochure Into Our Models

This is part three of my opinion and analysis on Goldman's apparent ramp up of Facebook shares in the face of, and in direct contravention to, SEC rules to the contrary. See Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private! and Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure. For the first two installments. Here I will outline the actual costs as reportedly explained in the fund marketing material, and next I will illustrate the ramp ups in actual valuation, as compared to the  private equity vehicle mechanics that can prevent Goldman from taking a loss, as was illustrated in the previous piece. Before I go on, here a few interesting tidbits from the mainstream news flow:

Bloomberg: Goldman Sachs May Sell, Hedge Facebook Stake Without Warning to Investors

Goldman Sachs Group Inc. clients considering whether to buy shares in closely held Facebook Inc. should take heed: Wall Street’s most profitable securities firm could unload its own holdings without letting them know. In the last sentence of a one-page investment profile sent to private wealth clients, the firm explains: “GS Group may at any time further reduce its exposure to its investment in Facebook (through hedging arrangements, sales or otherwise), without notice to the fund or investors in the fund.”... “There may be conflicts of interest relating to the underlying investments of the fund and Goldman Sachs,” according to the Facebook offering document’s disclosures section. Material in the documents “is not guaranteed as to accuracy or completeness.”

The phrasing in bold is all an astute investor needs to know in order to come to the conclusion that Goldman itself should be treated as an adversarial trading partner. For those with shorter term memories, Bloomberg assists with the reminisce...

Goldman Sachs paid $550 million in July to settle fraud charges filed by the Securities and Exchange Commission relating to the 2007 sale of a mortgage-linked investment called Abacus. The company said it made a “mistake” by failing to inform clients in the 2007 deal that it allowed a hedge fund betting against the investment to help put together the deal.

Here's is what the privileged HNW clients get to pay in order to buy the Facebook shares from Goldman with a retail brokerage price markup as opposed from the actual secondary market sites that have popped up...

To get a stake in Facebook, Goldman Sachs clients are required to make a minimum investment of $2 million by Jan. 7 in what’s described as limited partnerships based in the Cayman Islands and Delaware. Goldman Sachs is charging 0.5 percent of any capital committed to the partnership as an “expense reserve” as well as a 4 percent placement fee and 5 percent of any gains, according to the document.

Facebook has more than 600 million monthly active users, of whom more than 230 million access the site on mobile devices, the document shows. Statistics available on Facebook’s website indicate it has more than 500 million monthly active users and more than 200 million access from mobile devices.

A letter addressed to “potential investor” that introduces the Facebook investment profile ends with a two- sentence paragraph. The first asks potential investors to contact a Goldman Sachs representative for further information. The second says:

“Do not contact Facebook.”

Is it me, or is this deal expensive as hell? We are not even taking into consideration the markup on the shares that Goldman is guaranteed to make, which will probably trump all of the numbers above. For those who don't agree with my assertion that this is a RIPOFF tad bit costly, let's plug said numbers into the online private equity model that I made available to subscribers in my last posting on this topic.

Basically, 'nuff said. If you don't get it by now, you actually deserve to be one of those special Goldman clients that get access to this very special fund to pay all of those very special fees. Again, this is not hate on Goldman. More power to them for juicing the marketing machine for all its worth. Goldman is the Apple of the investing world. I'm sure if I worked for Goldman I would be doing the same thing. The fact of the matter is that I don't work for Goldman and I'm sure I can structure said investments in Facebook at those volumes for a whole lot less., as can many other institutions.

Don't get me wrong. I don't necessarily think these investments will crash and burn for the investor (LPs). Its really all a matter of pricing, valuation and timing. It does appear evident that the LPs will inevitably be trading against Goldman, though. You had better be ready and prepared, and you won't have that management fee and markup to cushion your fall like Goldman will. As a matter of fact, you will be the one paying it.

Next up (on this topic), I will post another live online spreadsheet model and opinion/analysis that gives an illustration of prospective Facebook private equity valuations in anticipation of an IPO. I know I said  I would do it yesterday, but a glitch came up in the forensic evaluation of a high leverage short candidate and 3 prospective yet lesser known long candidates - all of which have set the team back a few days. I am also working on a massive update to our European contagion model. That is a lot of work for the blog, when I could be hyping Facebook shares without full disclosure and registration to an unsuspecting public at outrageous markups/fees who may have more money to burn than spreadsheets to utilize, all with the intent of shorting the hell out of hedging positions at the very top of the hype marketing campaign, right? Okay, I'll stop - seriously!

Kudos to the Goldman team that put this together. It will be a blockbuster deal if it passes muster with the SEC. I actually think this is an ingenious and potentially very profitable set up.

Last modified on Thursday, 06 January 2011 11:50