Wall Street biggie – Citigroup Inc. (C - Analyst Report) is planning to exit Citigroup Alternative Investments unit, which is involved in various alternative investments, Wall Street Journal reported. The move comes on the heels of regulatory and financial pressure on the bank.
The unit includes a $3.4 billion fund – Citi Infrastructure Investors (CII) – raised in 2007, in which about $500 million was Citigroup’s own capital. The investment bank has decided not to invest in new infrastructure deals for this fund, which owns assets including a U.K. water supplier and a Spanish toll road. Notably, stake will be reduced to 20% from 37% in Kelda, owner of U.K.-based Yorkshire Water.
Further, the infrastructure fund participated in a number of warped deals, which included a futile $12.8 billion bid to operate the Pennsylvania Turnpike in 2008 and the failed $2.5 billion privatization of Chicago's Midway Airport in 2009. Moreover, the end of former co-head, Juan Beja’s tenure in 2009 compelled investors to stop extending the investment period of the fund.
Citigroup plans to sell some of the assets in the fund and transfer the remaining to a new asset manager. This move follows the bank’s strategy implemented in 2009 to exit hedge fund and private-equity units, impelled by stringent regulations and weak performance. The decision to spin off these businesses followed the regulatory reform bill that became law in Jul 2010.
The Dodd-Frank financial reform bill, which was signed into law by President Obama in July, has a number of provisions that would affect the business model of the financial institutions significantly. A provision in the law -- the "Volcker Rule," named after Paul A. Volcker, former Federal Reserve chairman -- restricts banks from utilizing their own capital to speculate in order to prevent huge risky bets.
Therefore, to comply with the rule, Citigroup has adequately reduced its alternative-investment business and will continue to exit more such businesses.
Beginning in 2009, Citigroup positioned some part of its alternative investments marketed to retail investors as Citi Holdings assets. Since then, the bank has been shedding these assets. However, the left over investments for institutional investors were placed in a new unit called Citi Capital Advisors (CCA).
In accordance with the Volcker Rule, Citigroup divested an internal hedge fund unit, which it independently renamed Napier Park Global Capital in Feb 2013. The unit was previously managed by the bank’s CCA division.
Moreover, several private equity and hedge fund businesses, which are on the list of divestitures include emerging-markets fixed-income unit, EMSO Partners, North American private equity investors, Metalmark Capital and emerging-market focused Citi Venture Capital International.
Apart from Citigroup, many other U.S. banks including The Goldman Sachs Group, Inc. (GS - Analyst Report), Bank of America Corporation (BAC - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Company (WFC) and Morgan Stanley (MS) are trying to reduce their investments in hedge funds and private equity. Though the regulation will take several years before its provisions and impact becomes clearer, these banks are considering a number of options to comply with it. Currently Citigroup carries a Zacks Rank #3 (Hold).