Citigroup Inc. has struck a deal to sell a $1.7 billion portfolio of private-equity assets to European buyout firm AXA Private Equity, marking the banking giant's latest divestiture as part of a strategy to clean up its books in the aftermath of the financial crisis.Citi held $3.4 billion in private equity investments, with $2.6 more in unfunded PEU commitments as of 12-31-10. How much of Cit's PEU portfolio went for $1.7 billion? Did they move the whole shebang for 50 cents on the dollar?
The portfolio consists of 207 limited-partnership interests in buyout funds, including stakes in funds owned by KKR & Co., Blackstone Group LP, Carlyle Group, Providence Equity Partners and others, as well as direct stakes in around 20 companies
Citi footnoted, "Private equity funds include funds that invest in infrastructure, leveraged buyout transactions, emerging markets and venture capital." Their 10-k speaks to the issue:
In addition, the Volcker Rule restricts Citigroup’s funds-related activities, including Citi’s ability to sponsor or invest in private equity and/or hedge funds. Under the Financial Reform Act, bank regulators have the flexibility to provide firms with extensions allowing them to hold their otherwise restricted investments in private equity and hedge funds for some time beyond the statutory divestment period. If the regulators elect not to grant such extensions, Citi could be forced to divest certain of its investments in illiquid funds in the secondary market on an untimely basis. Based on the illiquid nature of the investments and the prospect that other industry participants subject to similar requirements would likely be divesting similar assets at the same time, such sales could be at substantial discounts to their otherwise current fair market value.How does an illiquid investment have a current fair market value? That was the problem with "mark to market" accounting, which Congress changed.
Citi makes money as a manager of PEU fund investments.
The Company is the investment manager for certain investment funds that invest in various asset classes including private equity, hedge funds, real estate, fixed income and infrastructure. The Company earns a management fee, which is a percentage of capital under management, and may earn performance fees. In addition, for some of these funds the Company has an ownership interest in the investment funds.Layers of financial managers produce layers of fees.
Distressed PEU stakes usually find a bottom feeder. Goldman Sachs targeted private equity stakes in the aftermath of the financial meltdown. Bank of America dumped $1.9 billion in PEU investments last year.
Carlyle made capital calls to investors during the crisis, $681 million to CalPERS. Once turbulent markets returned to a sense of normalcy, Carlyle sold nearly every affiliate not nailed down. Carlyle affiliate Boston Private took $153 million in TARP funds, but their big subsidy came via BankUnited's $2.3 billion in FDIC cash. PEU's took a recapitalized BankUnited public, a year after saving it.
Citi's sale of private equity stakes is marketed as a risk reduction move. Yet, their pension fund is 16% invested in PEU's. That's nearly $3 billion in Level 3 pension assets as of 12-31-10.
Risk permeates Citi's latest structured investment. Note the tiny disclaimer:
This material was not prepared by the Research Departments of Morgan Stanley Smith Barney, Morgan Stanley & Co. LLC, or Citigroup Global Markets Inc., and you should not regard it as a research report."
This is what Citi and Morgan Stanley have to offer:
Welcome to the new world, where PEU's and Wall Street still own the government-backed dice table. Citi's Peter Orszag knows the game, inside and out. Bob Rubin taught him well.11% to 13% ELKS® based on The Goodyear Tire & Rubber Company (GT)
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