How A Goldman Sachs Scavenger Hunt Is Like A Private Equity Deal

Includes: GS
by: Felix Salmon

The one thing missing from Euny Hong’s wonderful dive into the all-night adventure that is the Goldman Sachs (NYSE:GS) scavenger hunt is an explanation of what, to any Goldman type, is surely the most interesting bit of all: the finances.

Hong does tell us that there were 20 teams, made up mostly but not entirely of some 180 Goldman Sachs employees, and that after paying $270,000 in expenses, they raised $1.4 million for charity. So, each employee ponied up about $9,300, of which about $7,800 was tax-deductible, right? Of course not. This thing was structured by a Goldman partner, Elisha Wiesel, so it was obviously much more complicated than that.

Wiesel came up with a solution: He would charge no entry fee, and he would launch the event as a non-profit fundraiser for Good Shepherd Services, where he is a board member. The roughly $270,000 of operating expenses were covered by Goldman Sachs Gives, a philanthropic fund financed by the firm and directed by its partners, through a grant made at his recommendation. “I wanted to be able to tell donors that every dollar they donated would go to the charity and not to operating costs,” he said. He appealed to his Goldman colleagues’ competitive spirit by asking them to support one or more teams with their own grant recommendation or donation to Good Shepherd Services, a New York-based non-profit that provides support for over 25,000 at-risk youth and their families every year. The event netted $1.4 million for the organization, the bulk of which executive director Sister Paulette LoMonaco said would go toward giving high school dropouts the training needed to finish school.

The first thing to note here, in terms of structured finance, is the weird and really rather clever use of the grant from Goldman Sachs Gives. Most philanthropic funds like to see their money put directly to good use. Goldman’s $270,000, by contrast, was spent on putting together one of the most lavish scavenger hunts the world has ever seen. Is it really a good philanthropic use of money to develop an iPad app which changes the color of the Bank of America tower? In Goldman’s eyes, yes, it is: because once Goldman was covering the expenses of the event, another $1.4 million poured into the coffers of Good Shepherd Services. By directing its money towards for-profit game designers rather than what non-profits like to call “program activities”, Goldman effectively managed to multiply its grant by an impressive multiple of more than 5X. No one knows better than Goldman that money is fungible; as a result, Goldman Sachs Gives doesn’t mind that it wasn’t their money which went to Good Shepherd Services. Truly this is a structure worthy of a Goldman partner.

And then, of course, there’s the tax angle. If Wiesel had simply sold 180 tickets at $9,300 each, then only $7,800 of each ticket would have been tax deductible, since each of the scavenger hunters received $1,500 (!) in scavenger-hunt value over the course of their sleepless night. Instead, under Wiesel’s structure, the full $1.67 million ended up being fully tax-deductible.

The trick here is to note that there was no entry fee: tickets, if they existed, were free. Wiesel separated out capital and labor, in the scavenger-hunt stack, as elegantly as he might create differing tranches of a collateralized debt obligation. Here’s how he explained it in an email to me:

The important thing to understand about last year’s event is that – for the most part, there are always exceptions – there were “payers” and there were “players”.

Senior professionals, mostly partners, at GS ponied up the $70k/team. For the most part this population did not play the game. These are the “payers”.

More junior professionals, again with rare exceptions, gave up their weekend and spend 15 grueling hours racking their brains and undergoing sleep deprivation, and did not pay for this privilege. These are the “players”.

I made my own GS Gives recommendation and covered the $13.5k/team operational costs such that the $70k/team raised was net rather than gross proceeds.

Think of this as you would a private equity deal. First, you have the founders, who aren’t rich but who are willing to put in sweat equity; they’re the talent, and without them nothing could happen. In this case, the founders are the teams — the 180 sleepless Goldmanites who ran around Manhattan all night solving clues.

But founders can’t do anything without money — they need people who are willing to invest in them. So you have the limited partners — the investors who put up the bulk of the cash. Here, the LPs are the Goldman partners, and other senior Goldman types, who ponied up $70,000 for charity so that they could sponsor teams in the hunt.

Finally, there’s the general partner, the architect of the whole thing, the person who makes it happen and who multiplies his initial investment. Clearly, the GP here is Wiesel, who managed to tun a $270,000 donation into a $1.4 million donation by dint of funding a scavenger hunt. (And in typical GP style, even that money wasn’t fully his: it came from the bigger Goldman Sachs Gives pot.)

Because the players aren’t contributing any money, they don’t need to worry about whether their contribution is fully deductible or not. Because the payers aren’t directly receiving the benefit of running around Manhattan all night, they don’t need to subtract the cost of the event. And because Goldman Sachs Gives gave the $270,000 to Good Shepherd Services rather than directly to the organizers of the scavenger hunt, that donation too was fully deductible.

It’s all quite admirable, in its own convoluted way: pretty much what you’d expect when Eli Wiesel’s son joins Goldman Sachs. I’m something of a connoisseur of Goldman Sachs charitable adventures: buy me a drink one day, and I’ll tell you the story of Hank Paulson, Tierra Del Fuego and the Bronx Zoo. This one isn’t nearly at that level, but it’s clever all the same, and I hope it gets repeated. Although at some point you do have to wonder whether they really needed to spend that much money on the game design.

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