With Facebook, Did Pension and Sovereign Funds Miss an Opportunity – or Dodge a Bullet?

(January 6, 2011) – The New York Times is reporting that a Goldman Sachs group that manages money for pension and sovereign funds turned down an offer to invest in social networking website Facebook before another section of the bank did just that.

The $20 billion Goldman Sachs Capital Partners (GSCP), the internal private corporate equity group led by Richard Friedman, reportedly was offered an investment opportunity in Facebook before the bank used its balance sheet to purchase a $450 million stake, and, in turn, sell shares on to wealthy investors.

Whether this is a good or bad event for pension and sovereign wealth fund clients of the bank has yet to be seen. What is clear, however, is that while Goldman is willing to sell shares in the social networking website to some wealthy clients, the same seems not true for GSCP, which is a fiduciary for its pension and sovereign customers. According to the Times, Friedman, “was concerned about Facebook’s $50 billion valuation and the terms of the deal.” Of course, institutional clients can simple circumvent the GSCP group and its decision by buying a stake via other parts of the bank that are currently offering a limited number of shares for sale.

Concerns have been raised elsewhere about the valuation of Facebook after the Goldman infusion. Facebook’s 2010 revenues were $2 billion, with $400 million in profit, according to reports – significant growth over past years, but still a stretch for many analysts considering the $50 billion implied valuation.

It is well known – and the Times comments on this fact – that the GSCP unit was harmed in the Internet bubble of the late 1990s. According to the Times, a $2.8 billion fund run by the unit invested upward of 70% of its capital in dot-com and technology companies during that time, which harmed its valuation on the other side of  the bubble.