Goldman Sachs Is Betting on Private Equity for Future Gain -- But That Could Be a Ways Off

Goldman Sachs' earnings are on the upswing again thanks to trading of plain-vanilla securities such as currencies and Treasury bonds. The investment bank also thinks it can still make money in private equity, but that won't happen for a while. For now, the Wall Street firm's private-equity exposure will continue to be painful.

Goldman is expected to report a gain when it releases first-quarter earnings tomorrow, mostly driven by at least $4 billion in net revenue from its trading division. Goldman is also betting that some parts of the private equity world are ripe for fresh investments.

For instance, it just raised a $5.5 billion secondary fund to invest in existing private equity portfolios especially by buying stakes from limited partners. And a month ago, Reuters also reported that the investment bank was looking to spend some of its $20.3 billion private equity on distressed assets.

But both strategies are bets on the future since for now, private equity is still creating more pain than gain. In Goldman's first quarter, for instance, private equity may produce some of the bank's largest losses.

According to a Barclays Capital report published at the beginning of the month but not available online, Goldman holds $12.2 billion of private-equity investments. It estimates that the portfolio lost about 12 percent of its value, or $1.5 billion, in the first quarter. That's roughly equal to all revenue from the bank's entire asset management division, under which private equity falls.

Such a loss also dwarfs writedowns expected in other categories. For instance, Barclays expects residential real estate write downs to be around $600 million and commercial real estate write downs around $400 million. Losses related to leverage loans are also expected to be around $400 million.

If Goldman times its distressed and secondary investments right, its private-equity business could end up turning positive in a few years. At least, that's the bet the Wall Street bank is making.