Rogue letter, stark reminder

Wednesday’s open letter by a Goldman Sachs derivatives trader who resigned on the same day caused a massive stink in the global business community. Nonetheless, it did describe a corporate ideal worth aiming for.

Most PERE readers will have read the open letter turned viral sensation by Goldman Sachs derivatives trader Greg Smith, who left the Wall Street investment bank on Wednesday.

Without doubt, his monologue about how Goldman Sachs had “sidelined” the interests of its clients and grown a “toxic” work environment towards the end of his 12-year employment – brought to an end on the day he handed his think-piece to the New York Times – stirred the global business world.

We aren’t going to attempt to validate its assertions, nor should we. As the jointly-penned response by Lloyd Blankfein and Gary Cohn, Goldman’s chief executive officer and president respectively, rightly states, Smith’s view is one from a workforce of 30,000.

Also, whether Smith truly was passed over for a lucrative bonus, as some subsequent newspapers have reported, or whether he was inspired by the film Jerry McGuire, whose central character has a similarly dramatic epiphany about his wayward world of sports agency, is immaterial.

What is poignant, however, was his description of a corporate culture that he held so dearly. His complaint set out the values any client-serving industry should hold central to their business thesis – private equity real estate included.

“It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients,” Smith said. “It wasn’t just about making money; this alone will not sustain a firm for long,” he added.

We are not saying Goldman Sachs actually lacks these things. It would be interesting, however, to learn if some of our readers have read the letter and recognise similar corporate behaviours, either pre-financial crisis or, worse still, today.

On the outside at least, the rhetoric of many players within the private equity real estate today looks right.

On our conference circuit, investment manager after investment manager has underlined the importance of open and frequent client (read investor) dialogue. We see evidence of managers listening to what investors want too, particularly in areas of discretion, but also in fee structures, co-investments and other alignments of interest.

The varying and often bespoke constructs of a number of new private equity real estate investment vehicles that have emerged over the past two years also is evidence of open ears and open minds among managers today.Those managers that have raised money – and more did in 2011 than 2010 – have the trust of their investors. Presumably, “doing right by our clients” – to borrow from Smith's letter again – has played its part there.

That’s not to say rumours and anecdotes have ended about poor or even shocking behaviour of certain firms in relation to their clients – a global publication like ours is likely to regularly be made privy to the dark underbelly of the sector. Furthermore, we will report on such activities when we can prove them.

Still, the need to be a proper fiduciary has been regularly articulated to us too, and there is a sense that investors see actions emulating words.

“Without clients you will not make money. In fact, you will not exist,” said Smith. This is obvious stuff, but it is a message that should still be considered more than just from time to time, including by private equity real estate firms. The sector appears to be doing well, but whistle-blowing like this offers up a stark reminder that it can always do more to stick the client at the centre of its universe.