SPV = SIV? Thoughts on the Goldman/Facebook news

Posted on January 4, 2011

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Big news early in 2011 with Goldman Sachs raising and investing up to $1.5 billion in Facebook.  To do so, Goldman is setting up a “Special Purpose Vehicle” (SPV).  Because Facebook is a privately-held company, it can have no more than 499 individual investors due to SEC regulations.  This SPV enables Goldman to make highly sought after Facebook shares available to Goldman clients via the vehicle, as the SPV counts as a single investor under SEC rules.

I’m sure that Goldman knows what its doing – there are many more smart people there than me. There are other reasons beyond just holding shares in Faceboook such as access to leading an eventual IPO. But from a larger perspective, the SPV option reminds me of the “Structured Investment Vehicles” (SIVs) that became popular during the sub-prime mortgage mess.  Banks like Merrill Lynch set up SIVs as a means of pushing risk off their own balance sheets. These SIVs were among the many contributors to bank blow-ups starting in 2007.

I’ve written a  number of posts about Facebook, including a look at their economics vs. market valuation. And as a Silicon Valley executive that’s been recruiting engineering talent, they’re awfully tough to compete against in the labor market.  Just seems that the parallel between the SPV and SIV on the surface is uncomfortable.

The Goldman investment puts Facebook’s valuation near $50 billion with company revenue estimated at $2.0-2.5 billion.  25xs revenue is high, but not incredible.  But one should wonder where the marginal valuation increase ceases to matter, and more importantly, where a marginal decrease of the same amount hurts far more.  If Facebook ends up at a $60 billion IPO, will that really matter as much as the prospect of the company’s valuation “dropping” to $40 billion in a few years post-IPO?

More on this from Andrew Ross Sorkin on CNBC yesterday.