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Goldman looks for stability
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August 24, 1998: 5:36 p.m. ET
IPO to help stem loss of capital as was seen when partners bailed out in 1994
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NEW YORK (CNNfn) - Goldman Sachs Group Inc. on Monday acknowledged that its highly anticipated initial public offering will help Wall Street's last major private partnership stem the loss of its capital base.
Retiring or departing partners in 1994 withdrew more than $200 million from the legendary New York investment firm -- contributing to a drop of about 5 percent in its working capital, Goldman Sachs said in its first public documents filed with the Securities and Exchange Commission.
Indeed, the financial powerhouse explained financial stability was one of the determining factors taken into consideration by the current class of 190 partners, who overwhelmingly approved the IPO plans earlier this month.
"From a financial perspective, public ownership will give us a more stable capital base, broaden our sources of capital and lower our funding costs," Goldman said.
The price of prestige
Like other investment banks, Goldman Sachs has relied heavily on short-term borrowing to finance its trading and advisory services.
Yet, unlike its rivals like Donaldson, Lufkin & Jenrette or Salomon Smith Barney, Goldman never had the luxury of turning to a cash-rich corporate parent. Instead, the firm has relied on its partners to contribute their own earnings in exchange for returns generated by its activities.
And those trading and advisory services have generated substantial returns in previous years. After yielding 28 percent in 1995, partners recorded 51 and 53 percent returns on capital in 1996 and 1997, respectively.
But if partners retire or leave for one reason or another, Goldman Sachs' activities could come under financial constraints. Two years ago, the firm even needed to re-invent its hierarchy, creating a new class of "junior" partners to stem a wave of potential defections.
From 1993 to 1994, the firm reported partners' capital dropped to $4.77 billion from $5 billion. During that time, pretax earnings plunged 80 percent to $508 million from $2.66 billion. The return on an average partner's capital was 10 percent that year.
Since then, its capital base has recovered. For the latest six months ended May, the firm recorded partners' capital of $6.6 billion, up 18 percent from year-ago levels.
And now, with the proceeds of the IPO, Goldman Sachs again will reward its employees with one-time award, which hasn't yet been determined. Each managing partner likely will receive $8 million to $12 million.
In addition, the firm plans to pay its new shareholders a cash dividend.
Many details were preliminary in the SEC filing. Exact terms of the offering will be disclosed in October.
-- by staff writer Robert Liu
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Goldman Sachs
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