May 23, 2007
Oaktree and GSTrUE
The Los Angeles Times is reporting that Oaktree Capital Management LLC, an alternative investment firm with over $40 billion in assets under management, has sold approximately 14% of itself for more than $800 million to less than 50 investors. It was previously reported in the Wall Street Journal that Oaktree was circulating an offering memorandum to sell a 13% interest in itself for $700 million. Oaktree is the latest firm to cash in on the private equity/hedge fund boom and follows in the heels of Fortress Investment Group's successful public offering and Blackstone's pending one.
The Oaktree offering is private and its shares will trade on a new private market developed by Goldman, "GS Tradable Unregistered Equity OTC Market" with the catchy acronym GSTrUE. Information about the market is limited as Goldman has done nothing to publicize it and Oaktree is apparently its first listing. But, according to reports, Goldman is hoping that GSTrUE will become a viable alternative listing market for hedge funds, private equity and operating companies who wish to avoid SEC regulation. Accordingly, the market will be limited to qualifying investment funds with over $100 million in investable assets.
GSTrUE, however, will live under the shadow of U.S. regulation. In order to avoid triggering Exchange Act reporting requirements for any listed company, Goldman and any such listed U.S. entity will need to make sure that the company does not exceed more than 500 shareholders. This will likely place Goldman in the position of forced market maker when the cap is reached. It will also even further reduce liquidity by limiting the number of trading shareholders and shares traded. Moreover, Goldman has not disclosed whether there will be any other market makers for this market, but given the likely low liquidity and shareholder trading limitations, Goldman is likely to set fat spreads on trades. Pricing is also likely to be opaque due to information and analysts' coverage gaps. While Goldman has incentives to maintain lower spreads in order to attract listings, these problems may be why Oaktree's offering values it at only $5.7 billion, a much lower valuation than Fortress and the one mooted for Blackstone. Time will tell if GSTrUE is a success, and it is certainly a worthwhile economic experiment on the validity of private markets, but I believe that GSTrUE's handicaps will likely make it more of a stepping stone for companies on their way to a full public market listing more than anything else.
NB. The L.A. Times is reporting that Oaktree shares are now trading on GSTrUE at $50 a share after being offered at $44. It would be more interesting to know the bid/ask spread.
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