NEW YORK - The top echelons of Goldman Sachs Group’s investment bank hosted a dinner over the summer with the representatives of almost 20 private equity firms at Manhattan’s Legacy Records restaurant.
The guests included the bosses of private equity firms such as H.I.G. Capital, Olympus Partners and Charlesbank Capital Partners.
These firms focus on “middle-market” transactions, which Goldman classifies as acquisitions between $500 million and $3 billion in size, a far cry from the mega-deals it has built its investment banking brand on.
Over a meal of Atlantic halibut and dry-aged ribeye steaks, Gregg Lemkau, co-head of Goldman’s investment bank, and Alison Mass, in charge of the financial sponsors coverage group, pressed one message: Goldman is serious about advising on relatively small leveraged buyouts.
The bank has sought to back up this claim with a major hiring spree. It created a dedicated team for M&A execution within its “financial sponsors” group covering private equity clients, and has grown this group from zero to 27 bankers in the last three years. Previously, M&A execution was handled by the bank’s sector teams.
The initiative illustrates how Goldman, already the No. 1 bank for private equity firms by fees earned, is looking between the sofa cushions for any new source of income to hit its goal, unveiled last year, of growing revenues by $5 billion by 2020.
Goldman’s new chief executive, David Solomon, is seeking to remove the bank’s reliance on volatile trading revenue, making expanding the already dominant investment bank a key part of this strategy.
Goldman has already been scoring its fair share of smaller deals. League table data from industry tracker Dealogic show Goldman has held a top three position in fees earned from US private equity-related deals between $500 million and $3 billion since at least 2013. However, in 2018, the bank is on track to have its highest fee share in that segment since 2014, Dealogic data showed.
“We had a look within the investment bank where we could grow our share of the pie and they saw an opportunity in the middle market,” Goldman’s Mass said in an interview.
ATTRACTING SENIOR BANKERS
One hurdle Goldman faces in implementing this strategy is attracting enough senior talent. Traditionally, the financial sponsors team was seen internally as training ground for many investment bankers, who learned to work on deals before they cultivated relationships with the corporate world’s movers and shakers, bank insiders said.
Many investment banks that are focused on the middle market, on the other hand, often boast careerists who have spent decades cultivating relationships with private equity firms that do smaller deals.
To counter this, Goldman Sachs has poached senior bankers covering private equity firms from the likes of Morgan Stanley and Credit Suisse Group AG.
There are plans to grow the M&A team further, especially in Europe, Mass and David Friedland, global head of the sponsor M&A team, said, without elaborating on the potential new hires.
“One thing we’ve tried to address is the misperception, often put forth by our competitors, that our most experienced M&A people were not also working on these (middle-market) deals,” said Friedland.
T. J. Maloney, chairman and chief executive of Lincolnshire Management, a private equity firm specializing in the middle market, said he had seen more deal flow from Goldman in the last couple of years.
“They made a push by hiring some pretty good people in the middle market, people who are really focused on covering sponsors like us,” said Rich Lawson, co-founder and chief executive of HGGC, another private equity firm which invests in middle-market businesses.
The new M&A group for private equity firms at Goldman was the brainchild of Stephanie Cohen, who last year was tapped by the bank to be its head of strategy. The group has helped diversify the bank’s fee revenue from private equity firms beyond the sector’s biggest players, such as Blackstone, Apollo Global Management and KKR.
“Over the course of the last two or three years, they’ve done a very good job reestablishing the connection with folks like us,” said Scott Sperling, co-president at Thomas H. Lee Partners, another US private equity firm.