While other banks let go of their private equity arms, Goldman Sachs holds on

I’m not letting go of this arm!
I’m not letting go of this arm!
Image: AP Photo/Susan Walsh
We may earn a commission from links on this page.

Credit Suisse is nearing a sale (paywall) of its private equity unit, the Wall Street Journal reported today. JP Morgan announced in June that it is spinning off its remaining private equity arm, One Equity Partners. That leaves Goldman Sachs as the only large bank that still has a big private equity unit—GS Capital Partners.

Big banks have been getting rid of or shrinking their private equity arms because of new US regulations (the Volcker Rule) that will prevent banks from making large investments with their own money. That’s the reason why banks are also eliminating proprietary trading.

Bank of America, Citigroup and others are also considering options for their private equity divisions. But none of those units have been as large, or as lucrative for the banks, as GS Capital Partners has been for Goldman Sachs. And that’s why Goldman wants to keep it. The size of the latest fund raised in 2007 was $20.3 billion.

That year, GS Capital Partners was among several large buyout firms that acquired Texas power company TXU, now known as Energy Future Holdings, for $44 billion. It has also acquired some iconic American brands, like restaurant chain Applebee’s, in 2011.

Under the new financial regulations, Goldman may have to shrink the size of its own investment in GS Capital Partners to around 3% of the fund. Goldman money currently makes up more than one-third of the private equity unit’s fund. The overall size of GS Capital’s next fund could also be smaller. That means it could also be less lucrative.

But if any bank can figure out how to make private equity still work for it, it’s Goldman, which is known for its creativity around financial products. The bank is reportedly setting up a new business development company, a structure that would be exempt from the Volcker Rule. The company will house a new publicly-traded credit fund, which will provide loans to mid-sized businesses. Goldman and some of its wealthy clients will invest in the fund.