Inside Goldman Sachs’ private equity partnership with China

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In today’s newsletter:

• Goldman’s private equity ‘partnership fund’ with China

• Europe’s ‘neobanks’ are put to the test

• Alternative investments lose momentum

Goldman and Beijing go shopping for US and UK companies

Former Goldman Sachs boss Lloyd Blankfein’s vision was bold: marry the investment skills of the Wall Street giant he ran with the financial firepower and China connections of the sovereign wealth fund China Investment Corporation.

CIC would be the “anchor investor” in a private equity fund that Goldman — through its merchant banking business — would manage. That fund would buy American companies with the potential to expand in China. CIC would take an unusually hands-on role helping the fund’s portfolio scout for deal targets in China and grow their operations in the country.

“The Cooperation Fund will increase Chinese investment in the United States, creating more opportunities for American workers and contributing to China’s economic transition and growth,” Blankfein announced at the fund’s launch, during then-president Donald Trump’s state visit to Beijing in 2017.

Rising geopolitical tensions between the world’s two superpowers made the pitch less compelling, as did increasingly fierce scrutiny from US regulators of Chinese money coming into the country. The fund, dubbed the China-US Industrial Cooperation Partnership Fund, raised $2.5bn — half its target. Curiously, it also never publicly announced any deals.

But the increasingly fractious relationship between Beijing and the west hasn’t been enough to stop the fund from making investments. As DD’s Kaye Wiggins and Will Louch reveal, the fund has backed a range of companies across the US and in the UK, even investing in a cyber security business that provides services to the British government.

Other investments include a start-up that tracks global supply chains, a consultancy that advises on cloud computing, a drug testing company and a manufacturer of systems used for artificial intelligence, drones and electric vehicle batteries. The pace of dealmaking stepped up in 2021, when it backed four companies.

The fact that the fund has been able to keep investing Chinese state money without publicly disclosing its origins highlights how the opacity of private equity funds helps some investors build up exposure to certain, key sectors, even as scrutiny of foreign direct investment mounts.

Goldman remains undeterred. The bank’s chief executive David Solomon met senior CIC leaders this year, and the fund is still on the hunt for deals.

Are Europe’s challenger banks their own worst enemies?

In a Zurich court this week, UBS settled a lawsuit brought by Credit Suisse against a popular finance blog whose posts had become a nuisance for the Swiss lender.

As the latter jostled for the title of Europe’s most scandal-hit lender with its German neighbours at Deutsche Bank, a new generation of digital players has risen in the continent to challenge an old guard in disarray.

But the end of the venture capital dealmaking boom and rising interest rates are testing their business models.

Despite attracting millions of customers, Europe’s fresh-faced “neobanks” have generally struggled to turn a profit. And some have proved that you don’t need to be an ageing bureaucracy to get in your own way.

Among the boldest new entrants was N26, the Berlin-based online bank that counts tech billionaire Peter Thiel and Hong Kong tycoon Li Ka-shing among its backers and sought to “do for finance what Spotify did for music”.

But founders Max Tayenthal and Valentin Stalf have struggled to hit the right note. An exodus of senior executives — some of whom accused the duo of establishing a “culture of fear” — and a growth cap imposed by German regulators have left them exposed.

SoftBank-backed Revolut has had similar woes. The UK challenger generated a third of its revenues from crypto in 2021 and has been fighting to fill that void amid delays to its long-awaited UK banking licence and scrutiny over one of its recent audits.

The good news is policymakers across Europe have welcomed this league of outsiders with open arms, including UK chancellor Jeremy Hunt, who has called Revolut and its rival Monzo “shining examples from our world-beating fintech sector”.

Healing self-inflicted wounds, and diversifying beyond their retail roots, will be key to reversing falling valuations.

“[Digital banks] have had to turn to wealth management or lending, none of them are doing it very well,” said Alex Barkley, managing partner at Lancero Capital.

Alternative investments take a fundraising hit

Apollo Global Management boss Marc Rowan warned us that a golden age for private equity buyouts was ending.

Alternative funds have raised $740bn since the start of the year, down 27 per cent from $1.02tn in same period last year, according to Preqin data.

“Fundraising has been more challenging in the past 12 months than any time in the last 15 years,” Drew Schardt, the head of investment strategy at private markets investor Hamilton Lane, told the FT’s Madison Darbyshire, citing volatility, geopolitics and interest rates after a nearly decade-long private capital boom.

Pensions and other large institutional funds fulfil cash calls using money handed back to them from successful deals. But a dealmaking slump has slowed down that process significantly, with less cash going in and less cash going out.

But there have been bright spots, too.

Secondaries are picking up as investors look to reduce their private equity exposure in lieu of consistent alternative asset classes such as private credit.

For some, the current cycle of lower growth and higher interest rates is an opportunity to sort the best from the rest.

Private equity firms would be forced “to go back to investing in the old-fashioned way. They’ll actually have to be very good investors,” Rowan cautioned earlier this month.

Job moves

• The board of struggling Swiss asset manager GAM plans to step down after the failure of a takeover offer by UK rival Liontrust, leaving the company in the hands of the activist investors who disrupted the deal.

• Nasdaq plans to name former UBS executive Sarah Youngwood as its new chief financial officer, per Reuters.

• Citigroup has hired Goldman’s Carles Jou as a managing director on its leveraged finance team in London, per Financial News.

• Former Goldman trader Benoit Bosc has joined hedge fund Millennium Management in a crude-trading role, Bloomberg reports.

• White & Case has hired Freshfields Bruckhaus Deringer’s Peter Mason as a debt finance partner in London.

Smart reads

‘Bankruptcy hardball’ Aggressive tactics are seeping into bankruptcy financing as so-called “debtor in possession” loans help creditors cut the line in terms of competition, DD’s Sujeet Indap writes for the FT’s Unhedged newsletter. Sign up here to get it every weekday.

Camp Citadel Hedge fund billionaire Ken Griffin has spared no expense in fostering the next generation of highly specialised traders, Bloomberg writes, opening math boot camps across the world to gain an edge in the industry’s war for talent.

Leverage and basketball Phoenix Suns owner Mat Ishbia pledged more than half of mortgage giant UWM Holdings’ outstanding shares to secure loans before buying the NBA team for $4bn, Bloomberg reports.

News round-up

Wilko bidder M2 criticises administrators PwC (FT) 

Country Garden asks for more time to repay renminbi bond (FT)

Life sciences firm Danaher to buy Abcam in $5.7bn deal (Reuters)

BlackRock hit by backlash after fall in environmental and social votes (FT)

JPMorgan increases stake in Brazilian digital bank C6 to 46 per cent (Reuters)