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What does it say when Goldman Sachs no longer wants you but others rush in? The U.S. bank has sold its remaining stake in ICBC, the world's biggest bank by market capitalisation, to realise almost three times the initial investment. In truth the deal does not say much more than that's private equity for you.
Goldman Sachs paid $2.6-billion (U.S.) back in 2006. In five sales, including this week's, it has netted profit of $7.3-billion for a compound return per year of 25 per cent. Nice. Since Goldman took a pre-listing investment, ICBC's assets and revenues have nearly trebled, while profits sextupled and, since the bank floated in October 2006, its shares have gained two-thirds. But it has not all been smooth sailing. The volatility of the stake, marked to market prices, provided a roughly $500-million drag on two occasions, although on average it added that much each year. And the profit does not account for the costs of the Goldman expertise that has been shared with ICBC. Nor does the bank take all of the proceeds: some of the stake was held for clients.
It is time for Goldman to move on. The genesis of the stake came from Goldman's private equity team and now ICBC's growth is slowing. The bank's price, relative to book value, has slid from more than two times on listing, and a peak above 4 in 2008, to 1.2. Revenues are expected to grow about 10 per cent a year over the next two – decent, but half the rate enjoyed during Goldman's investment – while profit growth of 6 per cent is a fifth the rate the U.S. bank enjoyed.
On a private equity basis, the deal performed. It should be remembered that when Hank Paulson first cosied up to ICBC in 2003 by buying portfolios of bad loans, ICBC had an official non-performing loan ratio of 25 per cent. Its success was by no means certain. Goldman took a risk and got rewarded. That is just how private equity should work.
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