US Equity House: Goldman Sachs
Building an empire
Goldman Sachs in 2013 reclaimed its status as the pre-eminent equity capital markets franchise in the Americas, commanding market share to an extend not achieved in the post-crisis era. For bridging the needs of corporate issuers and investor clients, Goldman Sachs is IFR’s US Equity House of the Year.
In a year when equity mattered more than ever to investors, Goldman Sachs was an unsurpassed facilitator of liquidity. Against a backdrop of historic investor returns, the bank had a hand in US$32.6bn of the record US$238.5bn raised by US corporations and secondary sellers last year, giving it an industry-leading 13.7% market share and putting it atop the league tables for the first time since 2005.
If history is any indication rivals would be wise to take notice – Goldman had a seven-year run (1999–05) atop the all-US equity league tables.
The performance was no fluke, but was the result of a concerted strategy to rank top three in each of seven industry verticals and product groups. On IPOs, the bank logged US$6.2bn worth of deals, ranking second; it came top of the tree when it comes to follow-on stock sales, with US$26.7bn of credit; and second on capital-committed block trades with US$10.8bn of business. Significantly, with the exception of industrials, where it was fourth, Goldman ranked third or better in each of the seven verticals.
“We think of equity capital markets as a franchise business for the firm,” said Stephen Pierce, global head of equity capital markets and a 28-year veteran of the bank. “Our competitors have gotten bigger and we are competing against all the biggest commercial banks in the world. We don’t position lending as the point of the spear. We rely on corporate finance and distribution to lead the way.”
Philosophically, a new approach towards committed capital marked the most significant change in the business over the past year. Rather than deride blocks as an unsophisticated extension of trading, as the firm did in the past, Goldman adopted a cautious approach focused on oversized commitments of large, liquid names.
“We don’t love the risk business. It’s a tough business. But using risk and applying risk in appropriate ways is the hallmark of Goldman Sachs,” said Pierce. “Going back to the days of Gus Levy it’s a business we founded,” he added, referring to the firm’s long-time trading head and senior partner in the 1970s.
A risk management committee is central to block execution. Chaired by Pierce, the six-member committee comprises Americas ECM head John Daly; Paul Russo, global co-COO of equities; US research sales co-head Jeffrey Nedelman; the senior ECM originator in the relevant industry; and a senior sales trader tasked with gleaning intelligence from buyside institutions.
The effort saw Goldman commit US$11.7bn across 21 trades, nearly one quarter of all committed capital and averaging US$560m per commitment. The resulting deal roster included a US$1.8bn shared-risk trade for mortgage REIT American Capital Agency, but also four sole bookrun efforts larger than US$1bn – for LyondellBasell Industries, Hertz Global Holdings, Nielsen Holdings, and AvalonBay Communities, the latter a US$1.1bn trade in May that was conducted the same night as a US$880m block of Equity Residential.
Arguably no block was as significant, or controversial, as the US$810.6m (pre-shoe) all-primary raise for JC Penney in September. The overnight sale followed the disposal a month earlier of activist investor Bill Ackman’s Pershing Square Capital Management’s 18% stake. It also came after a significant US$2.25bn loan recapitalisation in May that was backstopped by Goldman, and the ouster in April of CEO Ron Johnson just 17 months after he was brought in to turn the struggling retailer around.
“We knew from the financial crisis that when things start happening that put a company between the crosshairs of activist investors, a company can come under attack very quickly,” said Pierce. “The rhetoric was such that JC Penney would not be able to endure market exposure. “
Significantly, the overnight sale of 84m shares at US$9.65, the upper half of a US$9.35–$9.75 marketing range (and a significant discount to the last price at the time of US$10.42), shored up liquidity ahead of the crucial holiday shopping season and addressed a potential US$750m funding shortfall expected the following November. The subsequent exercise of the bank’s 12.6m share overallotment option pushed total sizing to US$932.2m.
If blocks were a catalyst of change, IPOs represented the engine of Goldman’s investment banking prowess.
Twitter, IFR’s US IPO of the Year marked the type of marquee transaction that eluded the bank in recent years. Rather than treat the microblogging pioneer as one for the masses – as was the case for Facebook, a client in 2012, or Google – a more targeted marketing strategy focused on qualifying key, long-term shareholders on predictive metrics such as valuation and long-term conviction.
The institutional top-heavy placement in November of 70m shares at US$26, above the US$23–$25 range that was revised up from US$17–$20, resulted in plenty of unsatisfied demand, culminating in a 72.7% day-one gain, but provided a solid foundation for future funding and monetisation efforts.
Highlighting the breadth of its franchise, Goldman participated in landmark transactions across industry verticals. These included the US$2.9bn IPO of Plains GP Holdings, an institutionally-focused vehicle tied to Plains All-America Pipeline, in the energy space; the US$2.6bn spin-off of Zoetis, Pfizer’s animal health unit, in life sciences; the US$1.46bn spin-off of ING US, the US life insurance operations of Dutch parent ING Group, in financial services; and American Homes 4 Rent’s US$811.8m IPO of REO-to-rental operator in real estate.
However, few transactions in recent ECM history were as complex as the US$1.1bn IPO of Empire State Building Realty Trust. Entangled in litigation for three years – a dispute that was still unsettled at the time of the October 1 pricing – the company was complicated both from a structural perspective as well as operationally.
On the corporate governance front, a dual-class share structure designed to protect the interests of insiders over public investors presented a necessary obstacle. An ownership base comprised of 3,300 operating partners at year-end 2012 represented an overhang to valuation.
Operationally, Empire State challenged investors with a business model that combined traditional real estate holdings with non-conventional assets, such as the observation deck and radio and TV broadcasting antennas. That the iconic tower was undergoing renovation that will run until 2016 represented another challenge.
Goldman Sachs, along with joint bookrunner Bank of America Merrill Lynch, conducted a series of tours with key institutions to help educate them on the “lease-up” potential of the 82-year-old building. A sudden turn in sentiment added further complexity as investors pulled US$415m out of REIT-dedicated mutual funds the week of pricing, according to Lipper, a Thomson Reuters company.
While not entirely successful – the hit rate was 65% – bookbuilding efforts centred on 15 institutions to anchor the placement of 71.5m shares at US$13, the low end of a US$13–$15 indicative range. Nonetheless, getting the deal across the threshold represented a significant accomplishment, as evidenced by a 7% gross spread, and a continuation of Goldman Sachs’ pre-eminence in REITs that has seen it participate in the last seven REIT IPOs larger than US$700m.
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