We posted this in June:
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.
For the record, Steve Jobs does not count. The proceeds of the $450 million Apple acquisition of NeXT Computer went to Canon and Perot, the big equity holders. Apple got a desperately needed new operating system at a time when its survival depended on it. For the record, NeXTStep is far better than the current Mac OS.
Today, the Financial Times (hat tip reader Steve) gives an update on the wind-down of some other Citi hedge funds that were part of Pandit’s empire. The article is a bit vague, but it appears that Citi may not only have lost pretty much all of its equity investment, but also took a big hit on loans to its hedge funds. Does that mean that Pandit was a more than $800 million acquisition, all in?
Citigroup’s Corporate Special Opportunities hedge fund is returning only 3 cents on the dollar to investors, underscoring the depths of the difficulties at the alternative investment unit once headed by the bank’s current chief executive, Vikram Pandit.
The amount being returned is less than had been expected when the company decided to wind up the fund last year…
Citigroup also stands to lose hundreds of millions of dollars it lent to CSO. It provived the fund with as much as $450m in credit lines and $320m in equity, while also placing assets with a nominal value of $1bn that it had bought in the fund.
Without the support from Citigroup, the hedge fund, which invested in corporate debt, would have had negative equity, according to a person with direct knowledge of the matter.
“Every fund that invested in bank loans in Europe and used leverage did not survive,” a Citi spokesperson says. “At least we are giving investors cash.”…
However, even by the current dismal performance standards for hedge funds investing in debt, the setback at the hedge fund is a major black eye for Citi Alternative Investments. In 2008, Citi Alternative Investments had to close or rescue troubled funds nine times.
The latest revelation is also likely to increase the pressure on Mr Pandit, who was responsible for the alternative investment unit for most of 2007. He and John Havens, who now heads Citi’s institutional securities business, joined Citi during 2007 after selling their Old Lane hedge fund to the bank for $800m.
By June 2008, Citi found itself in the embarrassing position of shutting down Old Lane, a move that forced the bank to put $9bn of the hedge fund’s assets on to its balance sheet and to take a writedown of more than $200m.