Among Vikram Pandit’s last jobs as Citigroup’s CEO was to decide the fate of the bank’s hedge-fund unit, which employs some of his oldest colleagues. He agreed to give them most of it for free.
Bloomberg reports that while Citigroup is keeping a 25% stake, managers at the Citi Capital Advisors unit will pay nothing for the remaining 75% of that business as it becomes a new firm managing as much as $2.5bn of the bank’s money, according to people with knowledge of the plan.
Citigroup will pay the executives fees while gradually pulling out assets to comply with impending U.S. rules, said the people, who requested anonymity because the terms aren’t public.
The deal was Citigroup’s response to the Volcker rule, which seeks to protect the financial system by restricting banks’ hedge-fund investments and proprietary trading. Instead of selling the funds or winding them down, the New York-based bank will give managers time to attract money from other investors while also granting them control of the business. CCA executives, who make bets on assets ranging from risky European loans to complex credit instruments, can wager with the lender’s money until it’s withdrawn.
'They’re getting a couple of years to diversify the client base away from Citi and to build a stand-alone firm', said Craig Cognetti, a partner with Grail Partners LLC in New York. 'If these efforts are successful, this could be very lucrative for the owners of the business'.
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