Thursday, December 19, 2013

Goldman loses the Volcker Rule battle over credit funds

About a year ago we discussed the argument made by Goldman's lawyers that under the Volcker rule, banks should be allowed to invest in credit funds (see post). The rationale is that if banks can lend to companies directly, why can't they invest in funds who make the same types of loans? In particular, Goldman was defending its lucrative mezzanine fund business which provides junior capital to companies. Goldman and other banks compete with private equity firms such as Blackstone in managing credit portfolios for clients.

The final Volcker Rule regulation seems to indicate that Goldman has lost that argument. (See great summary on Volcker Rule pertaining to private funds from Simpson Thacher - below)
Simpson Thacher: - the Agencies were unpersuaded by industry comments that ... credit funds (which are generally formed as partnerships with third-party capital that invest in loans or make loans or otherwise extend the type of credit that banks are authorized to undertake on their own balance sheet) should also be excluded.
That means Goldman and other banks will be limited to the standard 3% investment in the mezzanine or other credit funds they manage. And clients generally expect banks to commit significantly more of banks' own capital to funds they manage in order to avoid potential conflicts (such as having banks stuff these funds with bad investment banking transactions).

This is a big win for private equity firms who will be able to grab market share of this business from banks. However it's not a great outcome for companies who rely on this type of financing, as lender competition declines.

STB Volcker Memo
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