By Lauren Tara LaCapra and Carrick Mollenkamp
April 10 Goldman Sachs Group Inc (GS.N) has
likely generated around $1.2 billion of revenue over six years
from its dealings with discount retailer Dollar General Corp
(DG.N), a Reuters review shows. Just don't expect the investment
bank to boast about it.
Much of the revenue stems from an equity investment that is
lumped into a catchall earnings segment called "Investing and
Lending." Goldman created the segment in 2011 to shine some
light on how much money it makes from investing its own money,
but it still confounds analysts and investors because the bank
does not provide details on the performance of individual
The segment can have a large impact on Goldman's results in
any given quarter. In the fourth quarter, Goldman reported
nearly $2 billion in revenue from Investing and Lending, or 21
percent of overall revenue. Analysts expect the area to boost
profits again when Goldman reports first-quarter results next
week. Forecasts for the segment's revenue differ widely, from $1
billion to $2.2 billion.
"When you look at investment banking, it's very easy to
break out how they will do quarter to quarter," said Rick Scott,
chief investment officer at wealth-management firm L&S Advisors,
which has about $25 million invested in Goldman shares. "But
when it comes to Investing and Lending, what can you say? You
certainly don't have the transparency."
The revenue the bank has earned from Dollar General also
helps explain why Goldman, perhaps more than rivals, is
aggressively looking for ways to continue its principal
investing activities without running afoul of regulations such
as the Volcker rule, which restricts how much of their own money
banks can put at risk. It has lobbied regulators to preserve its
merchant banking business and has come up with new structures
for investments that are exempt from the rule's provisions.
Goldman is not required to provide details on individual
investments when it reports earnings, and the bank declined to
confirm or deny Reuters' calculations.
Unlike many of Goldman's investments, Dollar General is a
publicly traded company, which means both the bank and the
retailer have to disclose more information. A Reuters review of
six years of filings with the U.S. Securities and Exchange
Commission offers a rare - albeit limited - window into how
Goldman profits from betting its own money.
The review shows that Goldman affiliates have nearly
quintupled an initial $605 million cash investment in Dollar
General, which peddles everything from $1 packs of Snickers bars
to $5 packs of toilet paper. The investment was made as part of
a $7.3 billion KKR & Co LP (KKR.N)-led buyout in 2007.
Goldman has not only helped to turn around the retailer and
sell most of its affiliates' holdings at a profit but has also
earned money from serving as Dollar General's banker.
The broader KKR-led private-equity group - dubbed "Buck
Holdings" in a nod to Dollar General's bargain-basement brand -
took the retailer public again in November 2009 for $21 a share.
Since then, Goldman affiliates have generated roughly $2.5
billion of proceeds from stock sales and $77 million in
management fees as private-equity sponsors, the analysis shows.
It is impossible from the outside to calculate precisely how
much money Goldman itself has made from its Dollar General
dealings, because some information is not public. While Goldman
earned money from lending to Dollar General, for instance, it is
unclear if it held onto that debt or sold it, and whether it
booked gains or losses related to such sales.
Publicly available information on its Dollar General
dealings nevertheless adds up to $1.2 billion in revenue.
Goldman earned money on Dollar General stock sales through a
private equity fund called GS Capital Partners VI, which invests
a mix of client money, employee money and Goldman's own money.
The investment bank represents about 25 percent of that fund
- meaning that for the Dollar General buyout, Goldman
contributed about $151 million in capital and has generated
about $650 million in revenue from stock sales and management
fees. Goldman's share of the fund's remaining stake in Dollar
General amounts to about $70.6 million.
In addition, Goldman has also received at least $58 million
of investment banking and underwriting fees for taking the
company private and then public again; $479 million of interest
payments and repurchase commissions from making a loan to the
company; and $56 million for a derivatives trade pegged to that
loan, according to filings. It has also earned fees from clients
for managing the private equity fund.
"In this transaction, Goldman kind of nailed it – they've
done it all," said Michael Driscoll, a former Bear Stearns
executive who now teaches finance at Adelphi University.
Goldman does not run the Investing and Lending segment as a
single operation. Businesses whose earnings flow into the
segment do not share a common management team, and their
investment strategies vary widely.
The segment holds standard financial investments like
corporate bonds and stocks but has also made a slew of more
unusual investments, from a coal mine in Cesar, Colombia, to a
50 percent stake in the crime drama television series "CSI,"
which it sold in March.
Profits from an elite team called the Special Situations
Group also flow into Investing and Lending. That group has a
history of making big, profitable bets on troubled assets,
including a Japanese golf course and the pizza chain Sbarro Inc.
Not all investments have been a success. Goldman was a
sponsor of the $45 billion buyout of Texas utility TXU, which
turned into a terrific flop.
Over the long run, Goldman's principal investment has been a
big moneymaker, but it also causes unpredictable swings in its
fortunes from one year to the next because the bank marks its
assets to market. Over the past five years, Investing and
Lending has ranged from a pretax loss of $13.5 billion in 2008
to a pretax profit of $4.2 billion in 2010.
"Obviously it brings more volatility to earnings, and that
causes some investors and regulators and politicians to be
concerned," said David Stowell, a former Goldman executive who
teaches finance at the Kellogg School of Management. "But, on
balance, I think that Goldman has some talented people – I know
them quite well – who run that, and I expect that they are
making generally wise decisions."
The opacity of the segment has made the job of analysts and
The only investment Goldman details is an equity stake in
the Chinese lender Industrial and Commercial Bank of China Ltd
(601398.SS), which is big enough to warrant disclosure. The rest
of Investing and Lending revenue goes into three buckets:
equities, debt and the vague category "other."
In raising estimates for Goldman's first-quarter profits
over the past week, analysts have cited Investing and Lending as
a big driver. JMP Securities' David Trone said he doubled his
estimate for those gains, to $2.2 billion, based on broad market
trends, not any specific investments.
On a Jan. 16 conference call to discuss fourth-quarter
earnings, six analysts asked Chief Financial Officer Harvey
Schwartz for clarity on the segment.
Schwartz said the "idiosyncratic nature" of different
portfolios can affect how they are managed but gave few other
"In some quarters (the segment) will perform well; in some
quarters, we won't perform as well, relative to the
marketplace," he said. "But the market will drive that."
Adding to confusion are Investing and Lending's expenses,
which typically run $2 billion to $3 billion a year, even though
Goldman says it has few employees. Dane Holmes, head of investor
relations, said in an March interview that those expenses come
from paying people as well as from operating expenses of
investments like power plants and mines.
As for Dollar General, it has grown since its leveraged
It has hired new management, closed 400 unprofitable
locations, kept tighter controls on inventory and changed the
layout at stores to encourage customers to spend more, turning
the company around. Earnings have soared from $138 million in
2006 to $953 million last year, while sales have climbed from
$9.2 billion to $16 billion.
And the stock is up 137 percent since its relisting.
(Reporting by Lauren Tara LaCapra and Carrick Mollenkamp;
Editing by Dan Wilchins, Paritosh Bansal, Martin Howell and
Keywords: GOLDMAN INVESTING/DOLLARGENERAL
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