Goldman Sachs is asking investors in its $15bn private equity fund for approval to shift much of its remaining uninvested money into distressed debt in a stark indication of just how dysfunctional the buy-out business has become amid the meltdown in credit markets.
In recent months, many private equity firms have quietly shifted their focus to buying debt at a discount as they are unable to pay for acquisitions with cheap flexible debt as they could during the boom years. Goldman is now seeking to do likewise.
“Given the dislocation we are facing in the credit markets, we believe the ability to achieve private equity-like returns at an even more senior position in the capital structure provides a significant opportunity for the fund,” the bank told investors.
TPG, for example, plans to dedicate $2.5bn of its $18.8bn buy-out fund to distressed debt, and has hired Alan Waxman from Goldman Sachs to run it.
GSO, Blackstone’s debt specialist, has also been buying debt at a discount and plans to step up such purchases of the debt in its own deals.
For example, it has told investors in its funds that it and Bain Capital now control $500m of the debt of portfolio company Michaels Stores, bought from a hedge fund at cents on the dollar.
But such a shift in strategy can be perilous. On its earnings call in early March, Steve Schwarzman, Blackstone’s founder, noted that the firm lost money by wading into the corporate debt market too early. Blackstone also marked a multibillion dollar portfolio of debt purchased from Deutsche Bank to zero at its year-end.
For Goldman, there are also other issues. In some cases, Goldman will potentially be pitting itself and its investors against some of its best clients, the private equity firms controlling these highly indebted companies. Often, the goal of buyers of distressed debt is to ultimately control the issuing company when it cannot meet all its obligations.
However, one person familiar with the thinking at Goldman said: “Goldman will never go hostile against our clients. We will come to agreement and not push companies to file for Chapter 11 bankruptcy protection.”
Of the $9bn remaining in the fund, Goldman plans to allocate $4.5bn to stressed and distressed investments and increase open market purchases of both debt and equity securities from 10 to 25 per cent of total commitments.
Another $1.5bn will go to firms Goldman already owns in part to help them buy their own debt. Only $3bn will go to buy-outs, originally the only mission of the fund. Goldman has invested $2bn in the fund, including an additional $500m injected recently.
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