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Goldman Sachs Leans Heavily On Private Equity as Volcker Looms

For Goldman shareholders, it will be worth watching whether Volcker compliant private equity investments can support the bank's current Investing & Lending revenue and profits. For that to happen, Goldman would need to remain a heavy private equity investor and not just a manager of private equity assets.

The alternative would likely resemble the earnings streams of publicly traded alternative asset managers such as Blackstone (BX), Carlyle Group (CG) Apollo Management (APO) and KKR (KKR).

"The firm's aggregate net revenues from its investments in hedge funds and private equity funds were not material to the firm's aggregate total net revenues over the period from 1999 through the third quarter of 2013. We continue to manage our existing private equity funds, taking into account the transition periods under the Volcker Rule," Goldman said in its most recent quarterly filing with the SEC.

The bank also noted it has divested Principal Strategies and Global Macro Proprietary trading positions, units it deemed to be "bright line" proprietary trading that was most likely to be barred by Volcker.

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Whether or not Goldman Sachs escapes Volcker with its private equity profits intact will be an important question for shareholders and PE-industry insiders to follow as the rule kicks in starting in July of 2015.

Generally, the consensus is that Volcker has developed alongside a tide of regulation on capital and liquidity in a way that makes Wall Street safer but only minimally changed in the wake of the crisis.

"In our view, the five major regulators have done an excellent job of balancing the requirement of Dodd-Frank to end proprietary trading at the banks without permanently damaging the US capital markets," Brad Hintz, a banking analyst at Bernstein Research said in a Wednesday client note.

"Given all these changes, Bernstein believes that Goldman Sachs should be able to generate a 14-15% ROE at the peak of the cycle. However in a world of lower leverage and more limited risk taking, Goldman's capital intensive market making activities will likely be constrained and thus the firm will likely to generate fewer dollars of [economic value added]," Hintz added.

Goldman Sachs shares are up over 32% year-to-date and even rose in the wake of the unveiling of Volcker on Tuesday. The bank's stock, however, continues to languish at levels roughly 40% below record highs prior to the financial crisis.

-- Written by Antoine Gara in New York.

Follow @antoinegara

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