A few more thoughts on Goldman Sachs's investment in Facebook: Goldman invests $450 million at a $50 billion valuation along with a promise to bring along an additional $1.5 billion or so for Facebook from Goldman clients.
But Goldman gets two things by investing at that valuation that its clients won't get. First, it potentially gets a leg up with Facebook on the fees from a future initial public offering — fees that could potentially amount to $200 million or $250 million. Second, it gets to use the opportunity to invest in Facebook as a lure to attract private wealth management clients to its private wealth management business — if you've just sold your business and have $10 million or $25 million to invest, come put it with us rather than Bessemer or Credit Suisse or some other competitor, because we at Goldman can get you into Facebook, while those other guys can't. That private wealth management business also generates fees for Goldman.
Look, maybe this investment will turn out well for the Goldman clients, and they'll wind up doing almost as well as the firm itself. But the firm has its investment risk offset somewhat by those two fee fountains — the IPO and the private wealth management — while the Goldman clients have no such offset. It'll be interesting to see the disclosures on whatever Facebook investment vehicle Goldman sets up for its clients, and how they stack up against, say, the disclosures that IKB and ACA saw before investing in the Abacus 2007-AC1 $2 billion "synthetic CDO."
Life is full of conflicts, and in most cases the challenge is disclosing them or managing them rather than avoiding them entirely. But if I were someone looking to buy some Facebook shares, I'd probably be a little more comfortable buying them yesterday on Second Market at a $25 billion valuation than tomorrow from Goldman Sachs at a $50 billion valuation. It's one of the peculiarities of Goldman that its conflicts can be both its strengths and its weaknesses simultaneously. It's a strength, because being involved in all these different aspects of business — investing, IPO underwriting, private client management — allows Goldman Sachs to do things that smaller or more specialized firms, or even bigger ones that don't share information internally as well, can't. But it can be a weakness from a client standpoint because a client can start to wonder just whose interest comes first. If Goldman decides it wants to exit its $450 million investment, will the clients who invested the $1.5 billion all be notified in advance and be offered the chance to get out on the same terms?
None of this is intended to diminish the possibilities of Facebook in any way, shape or form. I'm on it personally almost every day, FutureOfCapitalism has a Facebook page, and I think it's an amazing invention that has amazing potential as a business. Whether it needs another $2 billion in capital at this juncture is another question. But aside from that, it's an interesting case study in how Goldman operates.