Citigroup plugs alternatives gap with Old Lane purchase
Charles Prince has probably had enough to worry about over the past year trying to run Citigroup without having to worry about the turmoil in the US bank’s $54bn (€40bn) alternative investments business.
Just as Prince made progress in cutting costs and addressing Citigroup’s flagging share price in the past month, he will be hoping the appointment this month of Vikram Pandit to run Citigroup Alternative Investments will bring a year of uncertainty to an end.
Pandit’s appointment, which came with the $800m acquisition of his $4bn hedge fund Old Lane Partners less than a year after it raised its first fund, fills a gap that has been vacant for the past year since the surprise departure of Michael Carpenter.
Since Carpenter left, the bank has struggled to keep up with the rest of Wall Street in developing its hedge fund and private equity business, and has lost several staff, including Tanya Styblo Beder, head of in-house hedge fund Tribeca Global Management, who left in September, less than two years after being hired from hedge fund Caxton Associates.
Citigroup has defended its failure to find a replacement for a year by saying the position was so important it needed to find the perfect candidate.
In not doing so, the performance of Citigroup Alternative Investments, which includes private equity, hedge funds, real estate and structured products, has suffered.
In the first quarter of this year, revenues fell 17% to $562m, and net profits dropped 37% to just $22m compared with the same period last year. The hedge fund business was hit hard, with revenues dropping by more than half. However, combined assets under management rose by one third to $54bn.
Prince will be hoping Pandit and his colleagues John Havens and Guru Ramakrishnan, all of whom worked together at Morgan Stanley until 2005, will reverse this decline. However, Pandit has not had the most auspicious start.
The day after his appointment was confirmed, one of the three top executives in the division resigned, apparently in disappointment at being passed over for the job.
Dean Barr had overseen the growth of Citigroup’s hedge funds and liquid investments division since November 2005, having joined from Thunder Bay Capital Management, a hedge fund he helped launch in 2003.
This is not the first time Barr has been in the news. In 1999 he was at the centre of legal action – State Street Global Advisors sued Deutsche Asset Management for hiring Barr and two colleagues.
Analysts argue that Prince needed to act radically to address slipping performance. David George, an analyst at boutique Edwards, said in a report: “The highly volatile alternative investments segment lagged the rest of Citigroup’s units this quarter.”
Citigroup said the fall in profits, also due to the absence of a gain on sale of shares in Travelers, an insurance company, and a tax benefit recorded in the previous year, were offset by double-digit growth in client revenues and private equity results.
However, Gary Crittenden, chief financial officer at Citigroup, said he expects “total gains to be lower than in recent history in this business for the remaining quarters of this year”.
Jeff Harte, an analyst at boutique Sandler O’Neill, estimated that Citigroup Alternative Investments profits this year will be $1.2bn, a tenth lower than last year.
Some believe Prince has paid too much for Old Lane. David Hilder, an analyst at Bear Stearns, questioned whether Citigroup was overpaying for the hedge fund in the bank’s results conference call.
Prince said he regarded the deal as an investment in 120 Old Lane employees rather than an acquisition. He said: “We end up with a plug-in in terms of our approach to alternative investments, as opposed to hiring a head who then has to go and re-staff the organisation. I feel good about buying a team rather than an individual in that sense.”
Pandit will be managing a more complex business at Citigroup than at Old Lane. Citigroup Alternative Investments has 13 investment centres across four main groups: hedge funds, which includes Tribeca and six other funds; private equity, which includes Citigroup Private Equity, CVC Equity Partners and CVC International; real estate, covering Citigroup Property Investors; and structured products, covering proprietary trading through Citigroup Alpha Strategies and Global Credit Structures.
He will also have to integrate his team from Old Lane into the management structure without triggering more departures such as that of Barr. Havens, former head of equities at Morgan Stanley and co-founder of Old Lane, will become president of Citigroup Alternative Investments.
Other managers are Dipak Rastogi, head of CVC International; John Barber, head of Citigroup Private Equity; Joe Azrack, head of Citigroup Property Investors; and William Comfort, head of Citigroup Venture Capital.
Some observers think the turmoil in alternative investment may have only temporarily been stopped, and that it could return when Prince looks for his successor.
Pandit has been touted as a possible successor to Prince alongside other candidates such as Robert Druskin, chief operating officer; Thomas Maheras and Michael Klein, co-presidents of global corporate and investment banking; Ajay Banga, head of the global consumer group; and chief financial officer Gary Crittenden. Pandit was considered a potential successor to Philip Purcell, former chief executive at Morgan Stanley, before he left the bank.
A Citigroup spokesman said: “This transaction has nothing to do with succession. This deal is about enhancing Citigroup’s growth, augmenting our talent with more world-class people and adding to our already robust platform.”
