The chief executive of Goldman Sachs (GS) has defended the investment bank’s work on the botched stock market listing of WeWork last year.
“I’m not sure that we got it so wrong,” David Solomon said when asked about WeWork during a panel talk at Davos on Tuesday.
“There were things that were right, there were things that were wrong.”
Goldman Sachs was one of the leading banks working on WeWork’s planned initial public offering (IPO) last year. The office rental startup’s stock market listing was one of the most hotly anticipated offerings of the year but it was ultimately forced to pull its much anticipated IPO due to lack of interest from public market investors, who questioned its valuation and business model.
WeWork subsequently lost over $40bn (£31bn) in paper value and was forced to seek a bailout from SoftBank, its biggest investor.
The Financial Times reported that Goldman Sachs had said WeWork — now worth around $8bn — could be worth as much as $96bn on the public markets during the pitching process. The Wall Street Journal recently named Goldman as among the “money men who enabled... the WeWork debacle.”
“One of the things that I’ve said publicly... is the process actually worked around WeWork,” Solomon said Tuesday.
“The banks weren’t valuing. The way the process of an IPO works when you're a bank is you’re invited in by a company, it’s a private company, their numbers aren’t public, they give you a model. You say to the company: well, if you can prove to us that the model actually does what this does, then it’s possible it could be worth this in the public markets.
“But ultimately there’s a diligence process, there’s a proving out process, there, at times, are meetings with investors before hand, and that process grounds to reality.
“I think that’s a great example of the process working. It might not have been as pretty as everybody would like it to be.”
He said private companies were also “not held to the same standard around producing information ... and that’s an issue.”
Solomon also blamed low interest rates for the dislocation between private valuation and public valuations, arguing the fact that “money’s basically been free” had led investors to “overvalue growth and undervalue future value of earnings that a company may provide.”
“I think we’ve seen a little bit of a rebalancing where the need to really think about a path to profitability is coming more sharply into focus than it might have been 18 months ago,” Solomon said.
Goldman Sachs said last October that WeWork’s abandoned IPO and subsequent write-down had cost the bank $80m.
Solomon’s comments came during a panel on valuing ‘unicorns’ at Davos. Also on the panel were New York Stock Exchange chief executive Stacey Cunningham and William Ford, the chief executive of private equity firm General Atlantic.
‘Unicorns’ are private tech businesses with a value of over $1bn. Reaching ‘unicorn’ status was once seen as a badge of honour for startups but 2019 was a disastrous year for those with the status. Companies that went public like Uber (UBER) and Lyft (LYFT) have seen their value plummet on the open market.
“We lost our way a bit over the last year, the last few years,” Ford said.
Japanese investment company SoftBank was an investor in both WeWork and Uber. SoftBank raised a $100bn venture capital fund in 2017 and has invested it aggressively since then, making big bets on startups in the hopes of supercharging growth. The fund’s investment style has been criticised over the last few months as valuations have come down.
SoftBank “did pursue growth at all costs,” Ford said.
“One of the things that we really objected to in terms of some places where we invested together was, they were really pushing companies to globalise so quickly even before they perfected their business model in one geography, let’s say.
“We were saying: let’s get the model right, let’s get the path to profitability, let’s get the unit economics working, and then we can think about expansion and growth. Instead it was: no, let’s go to China now.”
Solomon, Cunningham, and Ford are just some of the high-profile names attending Davos, which is the colloquial name for annual conference of the World Economic Forum (WEF). Around 3,000 world leaders and top businesspeople are meeting in the Swiss skiing village for a week-long conference discussing the biggest issues of the day. High on the agenda this year is climate change and its effects on the planet.