The Wall Street Journal reports today that Citigroup is shutting down Old Lane Partners, a hedge fund started by Vikram Pandit that the bank acquired a mere 11 months ago. The bank decided it couldn’t spare the capital to shore up the struggling hedge fund. The article noted:
Old Lane has essentially broken even since its inception. That isn’t terrible, considering the perilous financial markets of the past year. But it fell far short of the highflying performance craved by hedge-fund investors. Citigroup never marketed Old Lane to new investors, even after the fund was designated by Citigroup as its primary hedge-fund vehicle last summer, replacing the struggling Tribeca Global hedge fund.
So that means that Citi in effect paid $800 million to secure the services of Vikram Pandit.
Believe it or not, that sort of deal isn’t unheard of. In 2000, Chase acquired a merchant bank called Beacon Group for $500 million. The asset it really wanted was the firm’s founder, Geoff Boisi, who had headed the Goldman M&A department during the 1980s and was considered a premier dealmaker. Beacon itself was focused on the energy business, which was not an area of expertise for Boisi personally, and oil industry hands I knew thought that the firm was overstaffed and not particularly astute in its investments.
However, this precedent does not bode well for Citigroup. Boisi joined Chase as vice chairman, and given the high aspirations for him versus his near invisibility after he joined, it’s a safe bet that their return on the Beacon investment was not attractive.