Goldman Sachs’ TrUE is Truly Golden

So it happened. Oaktree’s unique public-while-staying-private offering is now complete. And the results were nothing short of terrific - for Oaktree, for Goldman Sachs, and for the institutional investors that now have another way to access top-shelf product that might not have become available in the absence of such an innovative structure. A few details from today’s story in the LA Times are provided below. It is interesting to note that both the tone of the story and the comments of the Oaktree principals are very much in line with my earlier analysis of the strategy:

Los Angeles-based Oaktree and its principals took in more than $800
million selling a stake of about 14% to fewer than 50 other large
investors.

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Oaktree, which manages about $40 billion in assets, specifically
decided not to offer shares to the public at large. Instead, its stock
offering is the first on an exclusive market created by brokerage
Goldman Sachs Group Inc.

The idea behind the market is to allow
private firms to raise money — and create a way for their executives
and employees to cash out some of their wealth in the business —
without taking the cumbersome route of going public.

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They said Oaktree’s shares, or units, were priced at $44 apiece late
Monday and began trading at $50 on Tuesday. Only institutional
investors can trade the shares; the general public isn’t allowed in.

“In
time, we expect to see this [market] employed by a number of premier
companies in other industries that wish to access liquidity and outside
capital but also to remain private,” Marks and Karsh said in the memo.
“It makes sense that there be a way for leading companies to accomplish
these dual goals.”

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If Goldman’s market becomes
popular, it could present more competition for the New York Stock
Exchange and the Nasdaq market as they seek to entice public stock
offerings.

“I think it’s quite appealing,” said David Brophy, a
finance professor at the University of Michigan. The greater federal
regulatory burdens imposed on public companies since the corporate
scandals of a few years ago have raised the cost and hassle of being
publicly traded, he said.

“A lot of companies now say, ‘What’s the point of being public?’ ” Brophy said.

Although
some analysts said Oaktree could have raised more money selling a
minority stake in the public market, Marks and Karsh said in their memo
to clients that that issue “meant little to us in comparison to the
advantages” of staying private.

RIght. So, the issue raised more than expected, as is normal for sought-after newly-issued shares. It traded up on the open like most solid IPOs. The entire issue was soaked up by only 50 institutional investors, resulting in an average of over $15 million in shares per buyer. This is not your your father’s retail-driven IPO of yesteryear. And oh, by the way, all of those nasty and annoying  legal, regulatory and compliance issues associated with being public are simply not present. And finally, the clear perception that any economic give-up by the principals by doing a private versus a public deal is well worth it. In sum, what does this indicate? Exactly what I spelled out two weeks ago, that the new issuance market in the U.S. is going to come under pressure - and fast. I have received a few comments from readers who believe that regulations like Sarbox, while a pain, are not a true deterrent to companies going public in the U.S. I have to roundly disagree. And time will tell. But if I were a betting man, I’d wager that the TrUE structure and the inevitable variants will become an increasingly attractive alternative for top new-issue prospects, especially now that Oaktree has broken the ice. The offering was a success and congratulations to all. Except my friends at the NYSE and Nasdaq, whom I assume are shaking in their boots.

AND NOW A LITTLE ON SARBOX

I was pleased to read about the SEC approving guidance to ease Sarbox rules. From today’s Wall Street Journal:

The 2002 Sarbanes-Oxley law requires company
executives to assess at the end of each year the adequacy of internal
controls over financial reporting — the policies, procedures or
activities designed to minimize the chances of inaccuracies in
financial reports. The internal-controls assessments, combined with a
separate evaluation by outside auditors, have spawned complaints that
rules mandated after the Enron Corp. and WorldCom Inc. scandals are too
costly and cumbersome.

Under the SEC’s guidance, company executives may be
able to conduct fewer tests and assemble a smaller amount of
documentation to back up their evaluations of internal controls over
financial reporting. The guidance gives managers leeway to use their
own judgment to identify the areas of their business most at risk of
creating financial errors, determine whether controls are in place to
address those risks, and then evaluate the operating efficacy of the
controls.

This is big, from both cost-saving and time-management perspectives for large companies and from a compliance perspective for small companies. For the first time it seems that Sarbox guidelines might actually be appropriate and achievable for smaller companies, which has certainly not been the case up to this point. Hopefully this will have a salutory effect upon the perception of the U.S. public markets. Because as noted above, we can use all the help we can get.

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COMMENT:

AUTHOR: Chris

EMAIL: junkmask@ha80.net

URL: 

DATE: 05/24/2007 02:48:08 PM

Long term, it may be interesting to see how/if these “private exchanges” affect the behavior of retail investors if more and more companies go this route. 

How will the traditional exchanges react as an organization and how will the actual markets be affected? Volume, volatility, etc.

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COMMENT:

AUTHOR: What next?

EMAIL: tlmcm@sbcglobal.net

URL: 

DATE: 05/24/2007 02:53:48 PM

Roger,

Your analysis about what this means for the NYSE and Nasdaq is spot on.

No mention in the article or by you about secondary trading in the issue. Now that 50 institutional guys are long, what about the concept of liquidity in the GSTruE framework to facilitate secondary trading?

While the primary transaction is fantastic for the issuer here, it would seem that numerous advantages on the secondary side remain with the established public markets.

Surely, GS didn’t leave this part out.

Any details?

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COMMENT:

AUTHOR: Wolf Stone

EMAIL: arudra17@hotmail.com

URL: http://please-dont-take-me-seriously.blogspot.com

DATE: 05/24/2007 06:20:34 PM

Wow…is this Goldman’s response to the whole ’ more regulation’ issue?? Coudnt Goldman’s ‘True’ also facilitate insider trading..since it will have no oversight/regulations??

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COMMENT:

AUTHOR: Yaser Anwar

EMAIL: yaser@yaseranwar.com

URL: http://www.yaseranwar.com

DATE: 05/26/2007 02:30:01 AM

IMO the issues on private exchanges will operate somewhat like Berkshire Hathaway’s A-class shares. 

Also, I think only the best will be able to go through private exchanges, as the institutions buying wouldn’t want to be left holding the bag with no one to sell to.

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COMMENT:

AUTHOR: Marc Milgrom

EMAIL: marc.milgrom@stern.nyu.edu

URL: 

DATE: 05/26/2007 08:34:25 PM

Interesting to hear your opinion of SOx in complete contrast to a colleague at Clear AM: http://www.clearamideas.com/clearam_ideas/2007/05/seeking_only_go.html

If the SarbOx burden is too high, we shouldn’t expect to see the premium the researchers found. Additionally, a very real limitation of GSTrUE (and I’m a GS employee) is the maximum 500 distinct shareholders. How do you think Oaktree will feel if it turns out in a year that they’ve exceed the threshold and are now publicly-held, the fate they wished to avoid?

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3 years ago | view comments |  Wall Street