Return to search

Goldman Sachs: $9 billion portfolio subject to Volcker Rule

  • Private equity is biggest segment of the $9 billion
  • CFO Harvey Schwartz doesn’t rule out spinoff
  • Firm has until 2017 under Volcker Rule extensions

Glenn Schorr, an analyst at ISI Group, asked Harvey Schwartz, the Goldman Sachs CFO, about $14 billion in fund investments disclosed in the firm’s investing and lending portfolio, included in its annual report.

“I am curious to see how you go about winding that down … over the next couple of years and what the backup plan is if you don’t sell it off,” Schorr said. “In other words, can you spin some off?”

Schwartz didn’t respond directly to Schorr’s question about a spinoff. Instead, he ran through the firm’s $14 billion in fund investments, including $7.4 billion in private equity, $3.6 billion in credit, $1.4 billion in hedge funds and $1.9 billion in real estate funds as disclosed in its annual report. (See page 146 of Goldman’s latest 10-K) 

Schwartz said that Goldman is eligible for a three-year Volcker Rule extension, which gives it until 2017 for compliance with the rule, which requires that no more than 3 percent of the firm’s capital be invested into an alternative pool.

Of the $14 billion, about $2 billion of investments are “as permitted”—not covered by the Volcker Rule. Goldman is in the process of redeeming about $1 billion, including hedge funds and credit funds where it has the “flexibility to manage our own path,” Schwartz said. On top of that, Goldman has about $2.5 billion of already-public investments, such as shares in companies that have gone public with lock-up restrictions on stock sales, for example.

“So when you add up all that math, the $14 billion at the end of last year brings you down sub-$9 billion,” Schwartz said on April 17. “The sub-$9 billion is the number we really have to manage.” Goldman has co-invested with its clients in all those funds, he said.

He did not elaborate further on what the firm may be doing to “manage” the $9 billion. Possible options for the firm could be selling down investments through initial public offerings, or other actions that would produce value for both limited partners and common stockholders, according to a person familiar with the firm.

The plight of Goldman’s sizable private equity business has been a topic on many of its recent quarterly updates to Wall Street. Nearly all other big investment banks have sold or spun off some or all of their private equity businesses. One recent example: Credit Suisse said April 1 it completed the spin off of its DLJ Merchant Banking Partners mid-market buyout business. The new firm is called aPriori Capital LP, which plans to raise its down fund.

Schwartz said in January the firm would steer clients toward “3 percent funds” that contain less than 3 cents of every dollar from Goldman Sachs insiders and the firm.

Back in November, CEO Lloyd Blankfein said the firm has been “actively harvesting” its private equity funds ahead of the Volcker Rule.

Goldman hasn’t raised a flagship fund since the 2007 vintage GS Capital Partners VI LP drew a whopping $20.3 billion in commitments.

On the deal front, Goldman Sachs is one of the sponsors selling Biomet Group to Zimmer Holding Inc for $13.35 billion. It also is a player in the April 27 bankruptcy of Energy Future Holdings. GS Capital Partners was one of four sponsors that led the $45 billion LBO of the Texas utility in 2007. Now the former TXU Corp owes more than $40 billion to hedge funds and investment firms.

On the acquisition side, GS Capital Partners teamed up with Koch Industries to buy Flint, a maker of printing ink, from CVC Capital Partners, in a deal announced April 15.