Goldman Sachs, pillar of ethical honesty in the lead up to the last market top and crisis, appears to be so bullish on leveraged loan and high-yield debt that it prefers to create an entirely separate holding company (that requires less transparency), raise external equity capital, lever up, and use a management team with “no experience managing a business development company (BDC).” As the WSJ reports, Goldman plans to offer shares in a new unit, Goldman Sachs Liberty Harbor Capital LLC “as soon as is practicable,” in a BDC that means it is exempt from the so-called Volcker Rule.
The entity also enables Goldman to report less transparently since it qualifies as an emerging growth company under the JOBS Act. The hope is to leverage the special purpose vehicle.
We can’t help but think back to the firm’s ability to create bespoke securitizations for its clients that implicitly enabled it to be short into the CDO collapse. In this case, we wonder if funding this vehicle with outside capital, remote from the bank itself, and perhaps transferring the bank’s exposure to HY and leveraged loans (which are trading at dramatically rich levels currently and have been called ‘frothy’ by more than one Fed president) is an implicit option on credit (if credit rallies, profits go up to parent entity; if credit tanks, entity implodes and eats ‘remotely’ the new equity capital without affecting the bank itself)? Or maybe we are being too negative?
Goldman Sachs Group Inc. has launched a new specialty finance company to invest in high-risk debt primarily of U.S. mid-size companies with no credit ratings.
… plans to offer shares in the new unit, Goldman Sachs Liberty Harbor Capital LLC, “as soon as practicable after the effective date of this registration statement.”
… the group has “elected to be regulated as a business development company under the Investment Company Act of 1940.”
Goldman said it expects the new unit will not fall be covered under the so-called Volcker Rule, which was is part of the Dodd-Frank financial regulatory overhaul.
The unit does qualify as an emerging growth company under the Jumpstart Our Business Startups Act of 2012, known as the JOBS Act, which could allow it to “take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies,” said Goldman in the filing.
Goldman said its investment advisor Goldman Sachs Asset Management L.P. and its management, which will earn incentive fees based on their performance, “have no prior experience managing a BDC.”