Citigroup Agreed to Carve Out Hedge Funds Before Pandit’s Exit

Citigroup Reached Deal to Carve Out Hedge Funds Before Shakeup
The Citi Capital Advisors unit holds about $5 billion of Citigroup Inc. cash, as much as half of which is invested in the hedge funds, according to a person briefed on the situation. Photographer: Peter Foley/Bloomberg

Citigroup Inc. agreed to move a stable of internal hedge funds to an entity controlled by bank managers in a deal reached before the firm’s top two executives, Vikram Pandit and John Havens, left this week.

The bank disclosed the move, calling it a “carve-out,” in a footnote to a quarterly financial supplement posted on its website Oct. 15. The funds have been housed in the Citi Capital Advisors division, which was overseen by then-Chief Operating Officer Havens. He said in March that the company was looking to let managers take a “significant” stake in the funds.

The deal was reached during Pandit’s final quarter as chief executive officer and may help Citigroup comply with the Volcker rule, which limits banks’ bets with shareholder money. The CCA unit holds about $5 billion of Citigroup cash, as much as half of which is invested in the hedge funds, according to a person briefed on the situation. The carved-out entity would repay the money over time, the person said, requesting anonymity because the figures haven’t been disclosed.

“Citi has begun transitioning certain CCA businesses from being wholly Citi-owned to being owned primarily by management,” said Danielle Romero-Apsilos, a spokeswoman for the New York-based lender. “As we announced earlier this year, this will allow us to facilitate our compliance with regulatory obligations.”

Cost Cutting

The bank’s board named Michael Corbat to replace Pandit as CEO on Oct. 16, and Havens resigned the same time. Corbat, 52, said that day he will “immerse” himself in the lender’s businesses and try to cut costs. Romero-Apsilos declined to comment on whether the shakeup may affect the hedge-fund deal or how much the bank may get from the managers for their stake.

Pandit, 55, and Havens, 56, joined the bank in 2007 when they sold their hedge fund, Old Lane Partners LP, to Citigroup for $800 million. They oversaw the fund unit before being promoted.

The pair previously worked at Morgan Stanley with the current heads of the CCA, James O’Brien, 52, and Jonathan Dorfman, 50. In October 2007, within months of Pandit and Havens’ arrival at the bank, Citigroup bought Carlton Hill Global Capital LLC, the hedge fund that O’Brien and Dorfman ran. Pandit and Havens later named them to lead the firm’s hedge-fund business.

CCA hedge funds trade across at least 10 strategies, including municipal bonds, corporate debt and distressed assets, according to the unit’s website. Manu Rana, Mukesh Patel and Kevin Bespolka are among CCA fund managers who also worked with Pandit and Havens at Old Lane.

Funds Excluded

Dorfman and O’Brien may control about 24 percent of the entity with Citigroup keeping 25 percent, said one of the people. The rest may be divided among fund managers and employees, the person said. Dorfman and O’Brien didn’t respond to messages seeking comment.

At least one of CCA’s managers hasn’t committed, according to two people with knowledge of the situation.

Rajesh Kumar, who heads the Mortgage/Credit Opportunity Fund in New York, has yet to agree, the people said. His $400 million fund has gained more than 20 percent this year through September after losing 4 percent in 2011, according to one of the people. About 95 percent of the fund’s assets belong to Citigroup.

CCA’s biggest hedge fund, the Emerging Markets Special Opportunities fund, may not be part of the new entity, according to two of the people. The fund, which manages more than $1 billion, is run by London-based executive Mark Franklin, 54, and invests in fixed-income products.

CCA manages about $18.6 billion in total, including funds from outside investors, a person familiar with the matter said in June. CCA’s venture-capital and private-equity funds also won’t be included in the new entity, and Citigroup is exploring options for them, one of the people said. They include the Metalmark Capital private-equity fund, which has invested in energy firms including Cantera Resources and Mountain Gas Resources, according to the fund’s website.

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