In order to counter the Volcker Rule, The Goldman Sachs Group, Inc. (GS) has registered Liberty Harbor Capital LLC as a publicly traded business development company (BDC).
Volcker Rule, a specific section of the Dodd-Frank Wall Street Reform and Consumer Protection Act, restricts banks to invest in hedge funds and private equity funds. Proprietary trading is also prohibited under this rule.
Implementation of Volcker Rule has been negatively impacting the overall earnings of major U.S. banks like Goldman. Goldman still earns management fees and incentive fees for providing investment management services to private equity and hedge funds. Following the implementation of the Volcker Rule, such earnings will be substantially impacted. Therefore, Goldman has decided to register Liberty Harbor as a BDC.
Liberty Harbor is a fund that invests in middle-market firms having weak credit ratings. Usually, Liberty Harbor invests in bonds and loans that are not considered as investment-grade, as credit rating agencies do not rate them. Further, under the JOBS act, Liberty Harbor qualifies as an emerging growth company.
Liberty Harbor will principally invest $5 million to $50 million in firms across different sectors, having annual adjusted earnings between $5 million and $75 million. The investments will have duration of 3 to 10 years.
Earlier, in Nov, 2012, Goldman provided initial funding to Liberty Harbor, which has invested roughly $73 million in 8 companies thereafter.
Apart from Goldman, many other U.S. banks, such as Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC), are also taking steps to reduce their investments in hedge funds and private equity to comply with the regulations.
Goldman currently carries a Zacks Rank #3 (Hold).
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