Some years ago Citigroup built a massive internal hedge fund platform called Tribeca. It was managed by Tanya Beder who became famous in advising Orange County on its derivatives fiasco in the 90s. She tried to turn Tribeca into an $20bn institutional hedge fund supermarket. This was a massively expensive undertaking that lasted for about 3-4 years and met with limited success.
Citi later bought Old Lane (Pandit's fund - that wasn't too successful on its own in terms of performance) for $800mm. As is typical of these large banks, it decided to build up Old Lane and shut down/replace Tribeca. Out with the old and in with the new. Then in 2008, when Pandit got promoted, Old Lane triggered the so-called key-man clause. This allowed Old Lane investors to withdraw their money immediately - as they promptly did. Citi followed by shutting down Old Lane as well. The firm later tried to rebuild the business once again under the name of Citi Capital Advisors.
Now, years later, Citi has a $6bn hedge fund platform which consists of Tribeca, Old Lane, and other pieces (including people and technology) of hedge fund ventures and acquisitions the firm undertook (more money was spent along the way to keep the funds going). The bulk of the platform consists of fixed income funds including mortgages, credit, (part of the AUM are some CLO assets - a low margin business) etc. - all involving heavy infrastructure expenditures.
Citi has about $2.5bn-$3bn invested in these funds, which of course puts the bank at odds with the Volcker Rule. So the firm recently decided to simply give the hedge fund platform to the managers - effectively for free - and spin them out into a separate firm. Of course Citi will have to pull its money out before the Volcker Rule comes into effect in 2014, forcing the new fund to replace the assets via an institutional fund raise. That's a difficult undertaking in this environment - even for Citi.
The spin-out marks a sad ending to a decade-long effort in Citi's history, as it spent an enormous amount of money trying to build, buy, raise a large hedge fund platform. With the spin-out, the bank will have little to show for after a decade of efforts. It's a great example of value destruction in a business that Citi as well as a number of other large banks never fully mastered.
Citi later bought Old Lane (Pandit's fund - that wasn't too successful on its own in terms of performance) for $800mm. As is typical of these large banks, it decided to build up Old Lane and shut down/replace Tribeca. Out with the old and in with the new. Then in 2008, when Pandit got promoted, Old Lane triggered the so-called key-man clause. This allowed Old Lane investors to withdraw their money immediately - as they promptly did. Citi followed by shutting down Old Lane as well. The firm later tried to rebuild the business once again under the name of Citi Capital Advisors.
Now, years later, Citi has a $6bn hedge fund platform which consists of Tribeca, Old Lane, and other pieces (including people and technology) of hedge fund ventures and acquisitions the firm undertook (more money was spent along the way to keep the funds going). The bulk of the platform consists of fixed income funds including mortgages, credit, (part of the AUM are some CLO assets - a low margin business) etc. - all involving heavy infrastructure expenditures.
Citi has about $2.5bn-$3bn invested in these funds, which of course puts the bank at odds with the Volcker Rule. So the firm recently decided to simply give the hedge fund platform to the managers - effectively for free - and spin them out into a separate firm. Of course Citi will have to pull its money out before the Volcker Rule comes into effect in 2014, forcing the new fund to replace the assets via an institutional fund raise. That's a difficult undertaking in this environment - even for Citi.
The spin-out marks a sad ending to a decade-long effort in Citi's history, as it spent an enormous amount of money trying to build, buy, raise a large hedge fund platform. With the spin-out, the bank will have little to show for after a decade of efforts. It's a great example of value destruction in a business that Citi as well as a number of other large banks never fully mastered.