Sacks of gold await US bank's partners: Goldman Sachs' London arm now challenges SG Warburg. Peter Rodgers explains why

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The Independent Online
A HANDFUL of the brightest people at the London offices of Goldman Sachs, the discreet but highly profitable American investment bank, could be setting off on the road to riches next month.

The firm will be increasing the number of non-Americans among the 143-strong group of partners who run the business. At present, there are only half a dozen Europeans among the 17 partners based in the London operations, which have grown so fast in the past six years that they now supply a quarter of group profits.

The prize of partnership could be worth many millions to the lucky candidates by the time they retire in 10 or 20 years' time.

Last week, Gene Fife, the American head of the London business, and a member of the 11-strong management committee, flew to New York for meetings aimed at honing down the list of prospective new partners to 30 or so names.

Mr Fife, the grey-haired, softly spoken epitome of a successful Wall Street investment banker, said in an interview just before he left for Heathrow: 'Every year an increasing number of high-quality Europeans are coming into the zone of eligibility for promotion. To me it is not a matter of whether or not there will be more European partners, just a matter of when. As they mature and develop, they will be popping up everywhere.'

The betting in London is that half a dozen of the newcomers will be non-US partners.

The partners share the profits, and last week it emerged just how great these are - dollars 1.15bn (pounds 675m) before tax in 1991. As a partnership, Goldman never publishes the numbers, but they leaked from the documentation of a securities issue by the firm.

At nearly pounds 170m, the London contribution - from a grand new office block constructed behind the old Daily Telegraph building in Fleet Street - is comparable with the pre-tax profit of SG Warburg, the flagship of British merchant banks.

The final list of new partners will be put to a selection meeting of all the partners that takes place every two years in a smoke-filled room at 85 Broad Street, close to Wall Street in New York.

Every partner in the firm is invited to send nominations, with no limit on the numbers. The management committee combs through the names in detail, cross-checks around the firm and goes back to the partners with a list. But the nominees themselves are never interviewed.

If previous partnership rounds are anything to go by, friends and rivals of the new European partners will soon be working out enviously on the back of an envelope what they are likely to be worth, as they did when the first British partners, Gavyn Davies and David Morrison, the top-ranking economists, and Mike O'Brien, the commodity and fixed income specialist, were elevated in 1988.

Judging by last year's increase in partners' capital, each on average became dollars 2.5m wealthier in 1991. In the first half of 1992, they gained another dollars 1.5m. The calculation from published sources works out on the high side, according to a source in the firm, but he declined to be more specific.

Between them, the 143 general partners who are active in the business and another 70 or so limited partners who have retired shared about dollars 2.2bn of the firm's total of dollars 3.3bn in accumulated capital at the end of May. The balance is owned by institutions, of which the largest is Sumitomo Bank of Japan.

Present partners have, of course, cleared the biggest hurdle - being selected - and may not think so much about personal capital as their employees. But in the Goldman Sachs culture, there is more than the prospect of future wealth to make the competition for partnership intense.

Conversations focus on the satisfaction of a partner's management role, and it is not the done thing to play up the attractions of capital.

Last week, half a dozen partners in departments as diverse as bond trading and economics talked about life at Goldman Sachs in similar - and always glowing - terms, although individually they are far from being identikit executives.

The main reason why partners' wealth does not loom as large inside the firm as outside is that they cannot get hold of it until they retire. Even then, withdrawals of capital must be phased over at least five years. While they are working partners, each year's share of profits is ploughed back into the firm's capital for expansion. A partner's initial salary falls from his earnings as an employee.

David Morrison is joint head, with Gavyn Davies, of the 50-strong research department. The son of a bus driver, he said: 'I might be the first Morrison in my family in the history of time to surpass average earnings.'

Becoming a partner at first made him poorer. 'Your cash flow definitely plummets for several years for the greater glory of being a partner. It is like an enforced pension plan. When you retire or leave you are entitled to it. But when you are there, there is unlimited liability. Would you invest all your wealth in one market? At the moment there is no wealth; it is a nominal amount in a ledger. If the timing of retirement is good, it will be a sizeable amount, but if it is not . . . there is a large risk element there.'

He has a point. It is only two years since a famous Wall Street investment bank, Drexel Burnham Lambert, bit the dust.

Another partner, who was coy about being named, said: 'It takes a hell of a long time to get back to where you were as an employee.' How long? 'I don't know, I haven't got there yet,' he said, some years after becoming a partner.

'The day after you are made a partner you go home and have dinner with your wife and come back and work harder than ever,' said Rick Garonzick, the American head of capital markets.

Mike O'Brien's department in London includes foreign exchange and bonds, but it is also a large oil trader and a player in the grain markets.

Are employees jealous of partners? No, he said. 'Partners are seen outside as mega-rich, but that is not the case at all. Their capital stays with the firm. My C registration Ford Granada is testament to that.'

Apart from Mr Morrison, who has a Ferrari that he excuses by his lifelong passion for cars, battered vehicles are a badge of pride among partners, who lose their company cars and have to buy their own.

Reinvestment of partners' profits has paid for Goldman Sachs to treble its London office to 1,200 staff since 1986, making it one of the biggest banking and securities houses in the City. That is a sad contrast with most pre-Big Bang London broking firms, where the partners took the loot each year, failed to invest, saw their firms taken over, and are now faced with tough competition from the likes of Goldman.

Bob Steel, head of equities in London, said: 'If the partners in America had put the money in their pockets, we wouldn't have had all this expansion in Europe. The cash flow and the success of America built the London business.'

Will the partners ever realise their capital through a flotation? 'Whatever my book value in the company I would get a mut, just like that. I relinquish all that. That is what makes it something special. Everybody here prefers to stay private,' Mr Steel said.

Mr Fife said: 'You are an owner of the business - as an owner your personal assets are at risk, you have unlimited liability and that focuses your attention in a very close personal way. It is a culture that has served us extraordinarily well over the years.'

(Photographs omitted)

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