Subscription Capital Call Loans

Subscription capital call loan facilitate investment in private equity deals
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Subscription capital call loans are offered by the private banking division of Goldman Sachs to high net worth clients who lack the funds to invest in private equity funds. This lending product thus has a fundamental similarity to the classic margin loan, which also is designed to facilitate the purchase of investments.

Rationale for Promoting Subscription Capital Call Loans:

Both Goldman Sachs and rival investment banking and securities firm Morgan Stanley have been moving aggressively to expand their private banking businesses, and to develop them into major profit centers. Goldman projects that its originations of new subscription capital call loans soon may reach $750 million annually. The total portfolio of loans extended by Goldman's private bank reached $13.8 billion by mid 2012, including home mortgages (among other types of individual and commercial lending).

Risks Associated With This Business:

One of the key risk management issues associated with subscription capital call loans is that the collateral backing them (specifically, customer owned shares in private equity funds) tend to be highly illiquid. Selling a position can be very difficult, and subject to severe markdowns where possible. This contrasts with the traditional margin loan, which is secured by much more liquid publicly traded stocks and bonds. In many respects, loans secured by private equity thus tend to have more in common with mortgage loans than with margin loans. Perhaps for this very reason, Goldman Sachs reportedly is hiring mortgage specialists into its private banking arm to oversee the origination and subsequent valuation of this new class of loans.

Promoting Private Banking:

The private banking push by Goldman and some of its leading rivals has been spurred, in part, by new and proposed regulations that are generating, or promise to create, negative impacts on the earning potential of their traditional core businesses in investment banking and securities trading. In particular, until recently Goldman Sachs was renowned for a highly profitable proprietary trading operation that was a major contributor to the firm's bottom line. However, during the financial crisis of 2008, both Goldman Sachs and Morgan Stanley were reorganized as bank holding companies in order to qualify them for federal assistance under the TARP program.

Though Goldman Sachs did not need such assistance, they were forced to take it by the federal government under the theory that its participation would reduce the stigma associate with participation, and thus mitigate the negative impacts on other, less creditworthy, recipients. As bank holding companies today, firms such as Goldman Sachs and Morgan Stanley are now regulated as such, and not just as securities firms anymore. In particular, the so-called Volcker Rule proposes to ban all proprietary trading by banking institutions, which now include the likes of Goldman Sachs, Morgan Stanley and many of their peer firms.

Source: "Goldman's private bank unit increases lending," Financial Times, September 6, 2012.

Also Known As

securities loan

Examples: Because the client did not have sufficient cash on hand to buy into a new private equity fund being sold by Goldman Sachs, he took out a subscription capital call loan.