The Dodd-Frank Act celebrated its sixth birthday on Thursday. Debate about its efficacy has hardly abated since the passage of a legislative package intended to prevent another financial crisis. One of its principal provisions, the Volcker Rule, has reshaped the way that funds leverage capital by restricting banks from committing more than 3% of their reserves to a hedge fund or private equity fund, or from owning more than 3% of a fund itself.
As a result, Goldman Sachs, currently raising its first buyout fund since the 2008 financial crisis, had to set a more modest target than the $20 billion raised for GS Capital Partners VI in 2007.
The firm plans to raise somewhere between $5 billion and $8 billion for a new vehicle called West Street Capital Partners, as first reported by The Wall Street Journal, named for the firm’s address in lower Manhattan. An initial close is slated for the end of this year. And there are other factors in addition to the Volcker Rule that have Goldman keeping its ambitions a bit more subdued than in the heady years ahead of the crash.
Private equity firms are still keeping record-high levels of dry powder in reserve, as you can read about in PitchBook’s latest U.S. PE Breakdown. Moreover, U.S. assets remain expensive. At least one consequence of this situation is that sponsors have continued to be more active in the core and lower end of the middle market, making a quarter of all deals in the $25 million to $100 million range during 1H 2016, the highest proportion since 2012. In short, Goldman is raising new funds at a moment when PE firms are struggling to make sense of a landscape in which traditional investment models no longer yield the kinds of returns seen in years past.
Although it’s no longer the world that Goldman once roamed, it’s still one the firm helped create.