Goldman Sachs Earnings to Get Boost From Mobileye Stake

Goldman Sachs Group Inc.’s third-quarter earnings stand to get a boost from a 2007 investment in an automated-driving technology company that’s more than doubled since a July initial public offering.

The bank owned 17.5 percent of Jerusalem-based Mobileye NV, mostly through its Goldman Sachs Investment Partners hedge fund, before it helped take the firm public in July, according to filings related to the IPO. The shares priced at $25, above the initial range of $17 to $19, and rose as high as $53.91 today. That advance may lead to a third-quarter gain for New York-based Goldman Sachs of more than $200 million, according to data compiled by Bloomberg.

While calm markets have suppressed Goldman Sachs’s trading business, they have been a boon to investments the firm makes with its own money. The investing and lending unit earned the most profit of Goldman Sachs’s four major business segments in the 12 months ended in June, and gains in companies that went public drove better-than-expected earnings last quarter.

Goldman Sachs “has successfully established a strategy that should allow the firm to continue in the principal-investing business in the coming years,” Brad Hintz, a Sanford C. Bernstein & Co. analyst, said in a July note. “The wisdom of that strategy is clear,” Hintz said, as such gains in the second quarter “once again provided an unanticipated boost to performance.”

Goldman Sachs invested $100 million in Mobileye in 2007, the first year the company had its driver-assistance EyeQ chip and algorithms put in new cars. The firm hasn’t said whether it added to that investment. Mobileye’s image-sensing technology uses a single camera to capture and display a vehicle’s surroundings, and anticipates potential collisions, according to the company.

Honda, Tesla

Mobileye, whose customers include Honda Motor Co. and luxury electric-carmaker Tesla Motors Inc., has leaped from a $1.5 billion valuation in July 2013 to a market capitalization of $10.8 billion today. Its $1 billion IPO on July 31 was the biggest in the U.S. by an Israeli company.

The investment shows the potential of Goldman Sachs’s strategy of serving as adviser and principal with key clients. The bank generated about $18 million from its role as lead underwriter of Mobileye’s IPO, according to a regulatory filing, and advised the company last year when it received investments from firms including BlackRock Inc.

Michael DuVally, a spokesman for the company, declined to comment on the firm’s holdings.

The investing and lending unit includes direct investments in debt and equity, stakes in private equity and hedge funds, and loans to corporate and individual clients. The unit earned $4.26 billion before taxes in the 12 months ended in June, or 37 percent of the firm’s total, on $7.14 billion in revenue.

Equity Gains

Gains from equity investments drove better-than-expected earnings last quarter and in the final three months of 2013. Chief Financial Officer Harvey Schwartz said in July that two-thirds of the $1.25 billion in equity gains for the second quarter came from companies that went public or experienced an event that resulted in a new valuation.

A $200 million gain would represent about a quarter of equity investment revenue for the average of the past 10 quarters. The firm had $18 billion of investments in private equity and $4.33 billion in public stock as of June 30.

Analysts including Citigroup Inc.’s Keith Horowitz have said that shareholders give Goldman Sachs less credit for investing and lending gains because they’re seen as volatile and difficult to predict. Schwartz has said the activities are “core competencies” of the firm.

ELQ Investors

Eighty-six percent of Goldman Sachs’s stake in Mobileye before the IPO was held by Goldman Sachs Investment Partners, a hedge fund that includes client money and the bank’s own capital. The other 14 percent was a principal investment held through a subsidiary named ELQ Investors II Ltd.

ELQ sold $36 million of its stake in the IPO, leaving it with 1.7 percent of Mobileye’s shares. The remaining stake would be worth $176 million at the Sept. 5 closing price if ELQ didn’t sell more shares after the IPO. GSIP sold $105 million of Mobileye stock in the IPO, leaving it with 12.3 percent of the company, which would be worth $1.3 billion.

The third-quarter gain for Goldman Sachs will depend on a number of factors, including how Mobileye’s stock trades in September and whether ELQ and GSIP maintain their post-IPO stakes.

The shares gained as much as 7.9 percent today, after General Motors Co. said it would introduce a Cadillac model in two years that uses automated-driving technology. Detroit-based GM didn’t name potential technology suppliers.

Mobileye Valuation

Goldman Sachs, which marks its investments to the current market price, hasn’t disclosed at what price it valued Mobileye on June 30. If it marked at $18, the midpoint of the original IPO range, ELQ would currently have a gain of $122 million. GSIP would have a $842 million gain, and Goldman Sachs would receive some cut of that as an investor in the fund.

Goldman Sachs’s own money accounted for about 35 percent of the $7.5 billion in the fund in October 2009, according to marketing documents at the time. Since then, the assets have shrunk and Goldman Sachs has pulled money from hedge funds to eventually comply with the Volcker Rule, which sets a 3 percent limit for how much of a fund can be a bank’s own capital.

The fund, which is managed by Kenneth Eberts, Raanan Agus and Nick Advani, had about $5 billion in assets at the end of June, the Wall Street Journal reported last month. DuVally declined to say how much of the fund is the bank’s own money.

Volcker Rule

Part of the unpredictability of investing and lending stems from Goldman’s need to exit $12 billion of the $14 billion in fund investments it had at the end of 2013 to comply with the Volcker Rule, Hintz wrote in June. The bank has said it will make those sales at a pace that won’t hurt other investors in the funds.

Gains like the one from GSIP’s stake in Mobileye may provide an incentive for Goldman Sachs to take its time in redeeming its capital. Mobileye has jumped more than 35 percent since the start of trading on Aug. 26.

Goldman Sachs’s own research analyst, Alexander Duval, issued his first recommendation of the stock that day. He rated the shares neutral.

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