January 3, 2011

Goldman Creates Facebook SPV

How Goldman Sachs’ creates a Special Purpose Vehicle (SPV) for funding Facebook.




Rob Day points out how the SPV works

Here's one overly-simplified way it works:  The bank in question creates an SPV, which then extends a term sheet for a 'venture round' to a recognized startup.  The term sheet is at a pretty high valuation, higher than a typical VC would be willing to value the company.  Why?  Because the banker actually isn't as motivated around returns.  It's not their money, the SPV is just a pass-through vehicle formed to satisfy SEC restrictions around the number of investors a privately-held company can have without having to report a lot of private information.  And the bank takes in fees from investors who participate in the SPV.  So the SPV is willing to pay a pretty high premium in order to be the lead investor (or at least major participant) in the round, just to gain access to those fees.  

In this case, Goldman Sachs has figured out a nice way to circumvent SEC rules and fund Facebook. And, everyone is happy

The existing venture investors get to point LPs to a big write-up, because a big round was raised at this new higher valuation.  And when the valuation is inevitably "leaked" it becomes a PR event in and of itself, lending more of a sense of massive momentum around the company, which leads to even more news coverage, etc etc.  When founder shares are then made available on one of the various secondary markets for privately-held stocks, those sales now of course also are based upon this new, higher valuation plus the additional publicity, so you can start to see implied valuations that are quite high.

The SPV’s are legal, so far. And, if the investors and investees want to get together, there is no amount of SEC rules that can keep them apart, the bankers will figure out a way.

The only thing wrong with this picture – it leads to an inefficient allocation of capital. Such funding events suck up capital from the system that could have been deployed for better productive uses.


Update:

Goldman fees for the Facebook investment (via WSJ)

Goldman will collect from new Facebook investors upfront fees of 4%, plus 5% of any gains, according to people familiar with the matter. Analysts said the securities firm also is likely to get a private-placement fee for arranging the deal. Such fees typically range from roughly 2% to more than 4%.

And at the IPO

IPOs are one of the most lucrative types of deals on Wall Street, generating fees of about 4% to 7% of the total offering. Facebook's potential IPO fees could be smaller because the deal is expected to be unusually large. Investment banks that took Google Inc. public in 2004 earned 3%