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Citigroup Looking Past Volcker May Seek $3 Billion for Funds

Date: Monday, June 21, 2010
Author: Bloomberg

Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, even as U.S. lawmakers consider banning banks from owning and investing in so-called alternative funds, people with direct knowledge of the plan said.

Citi Capital Advisors, which oversees about $14 billion, may seek $1.5 billion for private equity this year and $750 million for hedge funds, said the people, who declined to be identified because the plans aren’t public. An additional $1 billion is targeted next year for hedge funds, the people said.

“Citi must be comfortable enough that whatever happens, even in the extreme version, they’ll be able to move ahead with these businesses,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies the private-equity industry. “I don’t think any of these bills envisioned not being able to manage someone else’s money. It’s the bank capital that’s still an open question.”

The Volcker rule, named for former Federal Reserve Chairman Paul Volcker, seeks to avoid future bailouts by curbing risk-taking. The Securities Industry and Financial Markets Association, Wall Street’s biggest lobbying group, and the Financial Services Roundtable, a Washington-based trade group, have expressed concerns that the measure restricts banks from businesses that didn’t cause the financial crisis.

Lawmakers are reconciling House and Senate bills this month to overhaul regulation of Wall Street. Citigroup’s rivals aren’t waiting for final legislation to move forward with growth plans for their in-house money-management funds.

Clients’ Interests

Last week, Morgan Stanley announced it had raised $4.7 billion for a new global real estate fund, including $400 million of the New York-based securities firm’s own money.

Citigroup has about $5 billion of its own money in Citi Capital Advisors funds.

“Regardless of the ultimate outcome of financial reform, our priority will always be protecting the interests of our clients, who have selected us to be the fiduciary manager of their assets, and ensuring the soundness of the CCA platform moving forward,” spokeswoman Danielle Romero-Apsilos said.

The proposed legislation would restrict banks’ ability to trade financial instruments such as stocks, bonds and commodities on their own account, and bar them from owning or sponsoring hedge funds or private-equity firms. Federal banking agencies would have the power to exempt institutions who do such trading on behalf of a customer or to hedge risk.

Seeding New Funds

Even if the Volcker rule becomes law, full implementation may take as many as six years. Under the Senate bill, a study would have to be completed within six months of passage. Then, a council of regulators would then have to issue recommendations within nine months. That would be followed by a two-year phase- in period and three potential one-year extensions on a firm-by- firm basis.

Citigroup’s primary reason for investing in the funds is to “seed” new ones, essentially floating them long enough to build a track record that can then be marketed to investors, the people said. Putting in its own money also helps attract investors by signaling the bank has confidence in the management teams, they said.

Chief Executive Officer Vikram Pandit, 53, told a Congressional panel in March that the bank is taking steps to scale back its funds business. This year he sold off a $12.5 billion real-estate fund and a $4.2 billion fund of hedge funds. Still, he considers Citi Capital Advisors to be a “core” operation alongside trading, investment-banking, corporate cash- management and branch banking.

‘New Thrust’

Citi Capital Advisors is the former Citi Alternative Investments unit, renamed last year after more than a dozen of its funds with almost $80 billion of assets were shuttered or frozen amid the global financial crisis, causing more than $3 billion of losses for Citigroup.

In April 2009, John Havens, 53, head of Citigroup’s trading and investment-banking division, tapped a pair of former Morgan Stanley colleagues, James O’Brien, 50, and Jonathan Dorfman, 48, to rebuild the alternative-investing unit. Of the 16 funds listed in a March 2008 Citi Alternative Investments brochure, 11 have been closed, sold, renamed or merged into other funds.

“They basically are presenting a new thrust to the market since the challenges of ‘07 and ‘08,’’ said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire. ‘‘Gathering capital at this point is something they want to do.’’

Funds Marketed

Among six funds now being marketed is the $700 million Emerging Markets Special Opportunities Fund. It was started in 2000 and is led by former Salomon Smith Barney emerging-markets co-head Mark Franklin, returning an average 12 percent a year over the past decade, according to a Citi Capital Advisors marketing brochure dated April.

Another fund is the Mortgage/Credit Opportunity Fund, led by Rajesh Kumar. Citigroup lured Kumar and his team from hedge fund Halcyon Asset Management LLC in 2008 and agreed to seed them with $200 million of the bank’s capital, people with direct knowledge of the move said. The fund has gained 24 percent annualized since its May 2008 debut, according to the April brochure. It now stands at about $300 million, the people said.