Friday Letter Always bet on Sachs

Two pieces of news this week suggest Goldman Sachs is not, repeat, not out of the real estate investment business.

First, the firm’s real estate investing activities have been consolidated and restructured. Second, its latest Whitehall Fund has bought nearly 900 residential property loans in an Italian distressed deal.

Since the economy nosedived, Goldman has been busy reorganising. It has reduced headcount in Real Estate Principal Investment Areas (REPIA), which houses the Whitehall series of opportunity funds, in line with 10 percent cuts across other areas of the bank. All of the separate real estate investment strands to Goldman Sachs have brought together under the REPIA umbrella and within the merchant banking division.

REPIA pros are being redeployed globally. Richard Powers, for example, is moving back to New York from London to co-run the US business with Alan Kava. Similarly, Jean de Pourtales is relocating to London from Singapore to lead investing in Europe with James Garman.

The message from REPIA is that the current market turbulence plays to its strengths. It has a team that worked through the last financial crisis. In the Archon operations franchise it has 1,500 people and a huge global footprint to help REPIA find deals and work through asset management situations.

And in an environment in which investment-bank affiliated principal investment programmes are well out of favour, Goldman can still point to synergies across its house. Its contacts with Governments and financial institutions run deep around the world.

The deal in Italy is a prototype.

Goldman moved fast to make an unconditional offer to the receiver of an insolvent financial institution. It relied on Archon in Italy where it employs 140 people. The troops mobilized to assess nearly 900 non-performing and sub-performing loans.

Having got an assurance from the financial institution that it would sell at a market clearing price, REPIA moved in and bought them. It knows that the Archon team will now be able to work through the loans in the quirky, slow-moving Italian legal system.

Replicate this around the world and you can understand why Goldman Sachs feels excited again about opportunity investing.
This Italian job is not large (the book value of the Italian loans is €120 million) and it would be a mistake to think it forebodes mega deals around the world. But more important than cash (of which REPIA has plenty) is organisational dexterity (which is Goldman’s middle name).

No doubt Goldman Sachs has its detractors, not least those who point out recent large write-downs to its real estate portfolio and poor performance of recent Whitehall funds.

But Goldman is a place where creative destruction can happen internally, and the outward signs this week reveal a firm that is too busy transforming its operations in order to meet new opportunities to sit glumly contemplating its past missteps.