Private equity giant The Blackstone Group L.P. (BX) is reportedly in negotiation with The Goldman Sachs Group, Inc. (GS) to buy a marginal stake in the latter’s European pension insurance operation.
Blackstone’s Tactical Opportunities is expected to acquire Rothesay Life Ltd., Goldman’s London-based pension insurance business in Europe. Tactical Opportunities invests across Blackstone’s four chief strategies: private equity, real estate, credit and hedge funds.
Goldman intends to shed its majority stake over the span of one year in Rothesay, under pressure from new regulative guidelines. Under Basel rules, banks are required to maintain a capital cushion to absorb probable losses on assets. The Basel III regulations have made pension businesses less attractive for banks. The tough regulations have forced banks such as Goldman to vend their businesses to lesser regulated private equity firms like Blackstone.
Goldman’s Tier 1 common equity as of Jun 30, 2013, was 9.3% of the bank’s risk-weighted assets under Basel III rules. However, the N.Y.-based banking giant has set a goal of about 9.5% or 100 basis points higher than the regulatory limit.
Overall, Goldman is striving to enhance its balance sheet. In April this year, Goldman sold around 80% stake in Global Atlantic Financial Group, the reinsurance business in Bermuda to institutions and high net worth clients. This move boosted Goldman’s Basel III Tier 1 common ratio by 0.5%.
Further, in May, Goldman reduced its exposure to the Chinese economy by selling off its final stake in Beijing-based Industrial & Commercial Bank of China Ltd. (ICBC).
Moreover, in July, Goldman vended the majority equity stake in REDI – a financial technology company – to a consortium of investors, which included BofA Merrill Lynch, the corporate and investment banking division of Bank of America Corporation (BAC), Barclays PLC (BCS), BNP Paribas SA (BNPQY), Citadel and Lightyear Capital.
It appears that Goldman has been taking such action to reduce its non-core business exposure. Moreover, regulatory pressure to strengthen its capital ratios is another compelling factor that caused the company to take such measures.
Weak capital levels are always risky for the global economy. Additionally, conforming to new capital rules will likely act as deterrents to the present unstable economy. The capital rules will benefit the financial system in the long run. They will prevent bank failures and involve less of taxpayers’ money for the bailout of troubled financial institutions.
Goldman currently carries a Zacks Rank #2 (Buy).
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