"We absolutely cannot talk about it," was the repeated response of Goldman Sachs to market reports that it is setting up a mini private exchange to enable alternative investment firms to list without the hassles of regulatory oversight.
According to a newspaper report, Oaktree Capital, an LA-headquartered alternatives firm with $42 billion in assets under management, will raise $700 million by selling a 13% stake on this new Goldman Sachs Tradable Unregistered Equity OTC Market, or GSTrUE as it will be more fondly known.
The idea that Goldman Sachs can develop a sufficiently liquid market has been doubted by some Wall Street participants. "I find this all quite bizarre," says a hedge fund manager. "How on earth are they going to provide enough liquidity? They’ll have to ensure liquidity in even illiquid markets, making them a market maker in Oaktree and any other company they list on this market. I doubt they can manage that on their own."
Better to collaborate
A New York-based lawyer says his investment banking clients are bemused that Goldman has attempted to do this on its own. "It would be so much easier to have done this in a joint manner in order to create a proper market, but they’ve gone and named it now," he says. "I doubt any other bank would want to join in under that label."
Although it’s clear why the two parties would want to take part – Goldman Sachs for the fees, Oaktree to get wealthy – it is less clear what investors would get out of it. "I would think Goldman would be targeting its own investors, and these will be sophisticated high-net-worth and institutional investors. I’d be surprised if they weren’t insistent on transparency," comments one lawyer. Indeed, by listing with Goldman Sachs, Oaktree is avoiding any of the regulatory oversight that comes with a public share offering. Furthermore, it is generally thought that public share offerings of alternatives appeal to retail investors who cannot get access to hedge funds and private equity funds directly and so buy into the management company. Is Goldman therefore going to be targeting this type of investor?
It will be interesting to see how the product works – when both parties decide they can talk about it, that is. The growing trend of alternatives houses listing on public exchanges is not one that sits comfortably with everyone in the market. Fortress’s IPO was seen as over-hyped for example, and listings are seen by cynics as an easy way of making money for the founders and a lazy way to deal with investors. Taking the regulatory aspect out of the equation – a constraint that publicly listed alternatives companies at least accept – opens a whole new can of worms.