Goldman Sachs (NYSE: GS) Sees Funds Getting Smaller

Goldman Sachs (NYSE: GS) recently completed the investment stage for its 2007 fund, raising $20.7 billion, but  market insiders don’t expect it to return to market  seeking a similar sized pool of capital.

The firm’s global head  of Goldman’s merchant banking unit which hangles the firm’s private equity  investments, Richard Friedman, said he’d likely seek between $7 billion and $10  billion for the firm’s next vehicle. Friedman commented “We’ve all had to  readjust our strategies to do smaller deals.”

Instead of focusing on  large cap transactions, Goldman has instead reduced its target enterprise value  range for companies to $300 million to $3 billion. The fund is full invested  (excluding a 10% reserve for add-on deals), but the firm isn’t out trying to  raise funds. Friedman added “We’re holding off on raising a new fund until we get clarification on the new rules.”

The uncertain  regulatory environment is driving many investors to the sidelines, as they are  apprehensive to invest or expand without knowing the future landscape, and how  that will impact the market place. The firm will focus on returning capital from  its 2007 fund to limited partners. So far, it has returned 30% of invested  capital to LPs and has a multiple of 1.1 times cost.

With the changing  market environment and uncertain regulatory framework, the firm isn’t banking on  duplicating the success seen in the firm’s earlier funds. Friedman commented “These returns won’t be as good as the prior cycles,” attributing it to the time  it takes to deploy larger pools of capital and longer holding periods on portfolio companies.

The future for fund growth likely lies in the smaller and more nimble funds. With changing capital  requirements and shifting strategies, fund growth is likely to come from the  smaller firms with less regulation, rather than the bulge bracket market  makers.