| NEW YORK
NEW YORK Dec 3 Goldman Sachs Group Inc (GS.N)
real estate head Stuart Rothenberg told an industry group last
month that the firm had put more of its own capital at risk as
the commercial real estate market was peaking in mid-2007.
Goldman had increased its equity stakes in the Whitehall
fund family it manages and had invested more of its own balance
sheet in commercial property when markets were booming,
Rothenberg told the Real Estate Board of New York on Nov. 6 .
"The firm was, for all intents and purposes, almost an
enlarged hedge fund for the past couple of years, where the
more (investing) we could do on balance sheet and the less we
could do in the funds, the more we did," he said.
Rothenberg's remarks came one week before he announced
plans to retire at year-end and were a rare example of a
Goldman executive discussing the company's business in a public
forum. The Real Estate Board session was open to the press.
After rising for decades, property values began falling
last year as economic weakness and a global credit crisis began
to take their toll.
Exposure to this weakening market could add to Goldman's
woes. The firm is already expected to report a fourth-quarter
loss of $2 billion, driven by falling prices for a wide range
of equity and fixed-income assets.
Goldman did not return calls seeking comment. Rothenberg,
45, who joined Goldman 21 years ago and has run the real estate
unit since 2003, could not be reached for comment.
UPPING THE ANTE
One of the world's biggest commercial property investors,
Goldman's real estate division has raised more than $26 billion
from the bank, its executives and outside investors since 1991.
Nearly $8 billion was invested in the past two years.
Whitehall participated in the buyout boom, acquiring real
estate companies when property prices peaked, such as the June
2007 purchase of Equity Inns Inc for $1.3 billion.
Last February, a Whitehall fund purchased American Casino &
Entertainment Properties, which includes the Stratosphere
casino in Las Vegas, for $1.2 billion from billionaire Carl
Rothenberg, 45, told his audience that beyond Whitehall,
Goldman had been increasing its direct exposure to real estate
through principal investments, which means putting its own
balance sheet at risk.
Even within the Whitehall family, named for a Manhattan
street near Goldman's headquarters, the company was taking a
bigger piece of the action and taking on more risk.
"The firm used to be 15 percent of the capital in each
fund, then 20 percent of the capital in each fund, and then
over the past few years it had been about 35 percent of the
capital in each fund," Rothenberg said.
The firm said in a recent regulatory filing that its
employees contributed 36 percent of the $14 billion committed
to five funds in 2007 and this year.
In addition, "we were investing a lot on balance sheet, so
in each fund we carved out more and more so we could do them on
balance sheet and get more and more exposure," he said.
Those days are over, he said. Looking ahead, Rothenberg
said Goldman would focus on buying debt.
"Right now our primary vehicle isn't as much our
traditional Whitehall equity fund or our traditional Goldman
Sachs Capital Partners. It's our senior loan fund; it's our
mezzanine fund," he said.
Whitehall intends to put its $6 billion of equity to work
buying up distressed real estate assets, he said. Goldman
reported $3.9 billion of real estate investment exposure on its
books at the end of August.
Real estate has long been a huge money maker for Wall
Street, but in the past year sinking markets have created
humbling losses for the most aggressive players.
Lehman Brothers went bankrupt in September, in no small
part because of exposure to devalued real estate investments
such as property developer Suncal Cos and Archstone-Smith, an
apartment building real estate investment trust.
Morgan Stanley (MS.N), one of the world's largest real
estate investors, earlier this year suffered a $150 million hit
from an investment in Crescent Real Estate.
Likewise, Whitehall is struggling with poor performance and
potentially big losses on recent investments. The firm marked
down equity in its $4.8 billion Whitehall 2007 fund by half,
The Wall Street Journal reported Wednesday.
(Editing by John Wallace)