Four years ago, Goldman Sachs Group had a plan to help some of its institutional clients raise money without going public. The idea was to use a somewhat obscure provision of the securities law, Rule 144a, and raise big sums of money for clients privately — without going through the paperwork and the legal and public scrutiny that doing an IPO would involve. It was a unique way to have your cake and eat it too.
The Goldman Sachs Tradable Unregistered Equity (GSTrUE) platform quickly struck a chord with a few financial players looking to quietly raise capital. Oaktree Capital Management, a Los Angeles–based investment management firm, raised $900 million using GSTrUE. Apollo Management, the New York–based private equity firm run by Leon Black, raised $1.1 billion. Then suddenly the marketplace fell out of use.
In November 2007 Goldman merged GSTrUE with Portal Alliance, a trading system that originally had been developed by Nasdaq OMX Group. Nasdaq manages the aggregated platform; in addition to Goldman and Nasdaq, its owners include BofA Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, Morgan Stanley, UBS and Wells Fargo Securities.
A rare Goldman misstep? Journalist Gregory Zuckerman thinks so. The platform never attracted any real business, very little trading and has never amounted to much, he wrote in a recent Wall Street Journal article. The big idea has become an “afterthought for the firm,” Zuckerman contends.
In reality, GSTrUE was never about trading or liquidity; it was simply a place for raising large sums of money quickly and quietly — more money than through a Reg D offering and less onerous than an IPO. Nasdaq had operated a similar platform since Rule 144a was introduced but, in true Nasdaq style, had taken it nowhere. Goldman developed a similar platform and marketed it better.
“One of our most significant developments in the past year has been the introduction of the [GSTrUE] trading platform that permits our clients to issue and have an active trading market in unregistered securities,” Goldman noted in its 2008 annual report.
Privacy-conscious to a fault, Goldman was simply offering a product that secrecy-conscious financial services businesses such as hedge funds and private equity funds wanted and could appreciate. The ability to trade outside public scrutiny was an added plus. GSTrUE was an ideal product for a group of companies that needed money but didn’t want to tip their hand — a private stock parking spot that seemed even more attractive after the fiasco of the Blackstone Group IPO.
The New York–based private equity firm went public on Friday, June 22, 2007, raising a record $4 billion. By that weekend, every tabloid was reporting on the income of co-founder Pete Peterson, his social life with wife Children’s Television Workshop co-founder Joan Ganz Cooney, his politics and how much money he would make from the offering ($1.88 billion). They knew even more about co-founder Stephen Schwarzman, how much his 24 percent stake in Blackstone was worth (about $8 billion) and his lavish dinner parties.
On June 22, based in great part on the public disclosures by Blackstone, Congress introduced the Blackstone bill to increase the tax on the carried interest of private equity firms to 35 percent, the ordinary income tax rate. To avoid further uncomfortable disclosures Blackstone got a special exemption from the New York Stock Exchange so that it wouldn’t have to hold annual meetings or file regular financial disclosures.
Going public is a messy thing, especially in the age of Sarbanes-Oxley and Dodd-Frank. The disclosures required can be embarrassingly revealing as the recent IPO filing for Swiss-based commodities firm Glencore International demonstrates.
The recent oversized offerings of private equity–backed HCA, Kinder Morgan and Nielsen Holdings suggest that some companies are indifferent to what people know about them. They just want to cash out. Interestingly, Apollo, which used GSTrUE in 2007, went public on the NYSE on March 30, raising $565 million
But for emerging companies such as Facebook, Zynga and Living Social, surrounded by me-too competitors, keeping a tight lid on information is important. When Facebook wanted secrecy, Goldman raised $1 billion through Reg S, another securities provision that circumvents disclosure. And if others want similar privacy, the GSTrUE–Portal Alliance is still there.
