Goldman Sachs Group Inc (NYSE:GS) is reportedly avoiding the Volcker ban by contributing 20% in capital through a new fund that would make investments in commercial real estate-backed loans, according to a Wall Street Journal report.
Citing known sources, Craig Karmin and Justin Baer of The Wall Street Journal point out that Goldman Sachs Group Inc (NYSE:GS) is also making direct investments in real-estate assets.
Volcker rule
The Volcker rule, a centerpiece of the 2010 Dodd-Frank financial-overhaul legislation, was approved by government agencies earlier this month.
The rule caps banks’ ownership of hedge funds and other similar investments at 3% and limits their combined interests in those funds at 3% of their total capital, among other restrictions.
However, the rule provides for certain exemptions, including certain lending activities and real-estate investments.
According to The Wall Street Journal report, Goldman Sachs Group Inc (NYSE:GS) has raised over $1 billion for its new fund which aims to boost that total to $2 billion and Goldman expects to invest up to 20% of total equity commitments.
The Wall Street Journal reporters point out that the Volcker rule prohibits banks from owning more than 3% of a hedge fund or private equity portfolio.
Interestingly, last month Goldman Sachs Group Inc (NYSE:GS)’s CEO Lloyd Blankfein announced that the firm would begin winding down hedge funds to comply with the Volcker Rule.
Craig Karmin and Justin Baer of The Wall Street Journal point out that the twin act of Goldman Sachs contributing 20% in capital through the new fund and making direct investments in real-estate assets appear to navigate around new regulations mandated by the Volcker rule.
Goldman’s new fund outside Volcker’s ambit
Citing people familiar with Goldman Sachs Group Inc (NYSE:GS)’s fund, The Wall Street Journal reporters point out that the new fund’s focus on real-estate loans, and its status under previous U.S. government company laws, leaves it outside the Volcker rule’s definition of hedge funds and private equity funds.
Interestingly, the rule forced Goldman Sachs Group Inc (NYSE:GS) to change the fund’s name, removing the reference to ‘GS’ that appears in a predecessor real-estate debt fund. The reporters point out that the fund is now called Broad Street Real Estate Credit Partners II, referencing Goldman’s former headquarters at 85 Broad Street.
The Wall Street Journal report highlights Goldman Sachs Group Inc (NYSE:GS) jumping into property investment in the 1990’s. Goldman’s Whitehall real-estate fund group raised billions of dollars and made splashy investments. However, following the crisis, Whitehall had to write down substantial losses. For instance, in its September letter to investors, Whitehall said the equity value of its $4 billion fund had been marked down by 59%.
