Goldman Sachs Group, Inc. (NYSE:GS) is w0rking on a way to get around some of the provisions of the Volcker Rule, according to an article by Reuters journalists Jessica Toonkel and Lauren Tara LaCapra. Sources quoted by Reuters say that the company is working on ways to continue investing in Private Equity without infringing on the Volcker Rule. Wells Fargo & Co (NYSE:WFC) is using similar loopholes to allow it to move into Private Equity.
The specifics of the Volcker Rule have been delayed, and they may not appear until the second half of 2013. It is expected that the regulations will put limitations on the ways banks can invest in private equity, putting an end to risky private equity funds run by major investment banks. Goldman Sachs Group, Inc. (NYSE:GS) appears to have developed a strategy to circumvent the rule, however.
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
According to people close to the matter, Goldman Sachs will allow clients to deposit money in accounts designated for Private Equity investment. The company would then combine that money with the bank’s own, and the capital of some partners. This is a slight deviation from a formal fund structure, but it is expected to be enough to allow the bank to avoid regulatory interference.
The Reuters journalists covering the story were unable to glean the fee structure for clients, or the tax implications of the instrument. What is clear is that Goldman Sachs Group, Inc. (NYSE:GS) expects to be able to invest as it did before in Private Equity. The Volcker Rule seems unable to reign in their activities.
The real problem is that the specifications of the Volcker Rule have not been released yet, so it is impossible to know what will or will not work in a post Volcker Rule world. The latest draft of the rules say that a bank will not be allowed to invest more than 3% of Tier 1 capital into private equity. This limitation does not seem to apply in cases where the capital is not in a formal fund.
The over and back between regulators and banks make the formulation of the rules even more difficult. As those in charge pick up on loopholes like this one, with banks already beginning to exploit them, they may feel compelled to close them. In the end this might result in more comprehensive legislation, but it could guarantee lengthy delays.