Speaking of Goldman Sachs (NYSE: GS) last week, renowned bank analyst Dick Bove had this to say:
If you believe that money supply over time constantly goes higher -- and money of course is the raw material of this company -- then you have a company whose raw material continues to grow, who handles that raw material better than any other company in the world, who ultimately is going to benefit by the expansion of the world financial system. Why wouldn't you want to own that stock?
I can think of one reason why: Because the main beneficiaries of Goldman's success are its employees, not its shareholders. As former Goldman partner Leon Cooperman succinctly put it, "I determined many years ago that if you want to make money on Wall Street, you work there; you don't invest there. They just pay themselves too well."
On average, half of Goldman's revenue is set aside for employee compensation. For a company reliant on human capital, this isn't rare. Law firms, accounting firms, and consultancies pay roughly the same percentage too.
But there's a reason most of these businesses aren't public companies: they don't need a lot of capital to operate. There's no need to go public and raise money. All you need to run these companies are people, desks, phones, egos, and Red Bull. The only way you could take a law firm public is by duping investors into thinking a large slug of capital could be employed in an efficient way, which it almost certainly couldn't. When law firms only gain revenue from the work lawyers do, and lawyers end up claiming fully half the revenue for themselves, taking care of outside shareholders at meaningful rates of risk-adjusted return is tremendously difficult.
Same goes for Goldman. There are only two reasons a company like Goldman would want to be a public company: to shift risk onto someone else, or to cash out on unsuspecting dupes.
That's also essentially the story of Blackstone (NYSE: BX) and Fortress Investment Group (NYSE: FIG), which have both been decimated since they went public. Since these companies don't need additional investors' money to operate -- there are no factories to build, no large capital expenditures -- logic tells you they won't deploy it for those investors' benefit. And they didn't. Remember Blackstone's 2007 IPO? As Reuters put it: "The firm will use most of the proceeds to pay out to employees ... according to its prospectus." Ooh! Where can I sign up?!
It's easy to forget that Goldman was a private company until 1999. For the 130 years preceding its IPO, it thrived. It doesn't need public shareholders' money. Employees would just prefer having it to improve their own wellbeing. Ferraris don't buy themselves, you know.
