Citigroup Inc. (C) said Tuesday that it has agreed to sell a portfolio of private-equity investments to Lexington Partners Inc., while StepStone Group LLC will provide management services to the funds.
Terms of the transaction, one of the biggest ever in the market for secondary private-equity interests, were not disclosed.
The deal includes Citigroup's stakes in bank-branded funds-of-funds, mezzanine funds, feeder funds and co-investment businesses, or basically what is left of Citi Private Equity.
The deal is part of the company's plans to unload noncore assets to reduce its size by about one-third.
Upon completion, the transaction will reduce GAAP assets in Citi Holdings, the bank's portfolio of non-core operating businesses and assets, by about $1.1 billion. The transaction is expected to close early in the fourth quarter of 2010.
Citigroup and other large banks aggressively built out their private-equity investments during the buyout boom, believing that investing alongside large private-equity firms in their buyout deals would not only generate strong returns, but also help them in competing for assignments underwriting bank loans or bonds for such deals.
These banks are now looking to sell noncore, less-liquid holdings such as private-equity stakes after a series of government rescues amid the financial meltdown of 2008 and 2009. Citigroup was one of the worst hit banks during the subprime crisis and has received $45 billion in bailout money. In April, Bank of America Merrill Lynch, part of Bank of America Corp. (BAC), announced a $1.9 billion sale of its portfolio of investments to AXA Private Equity.
Citigroup said that StepStone will provide ongoing management and advisory services for the CPE businesses' $4 billion fund of funds, feeder and co-investment funds. Lexington Partners will acquire a portion of Citigroup's proprietary capital investments in the various funds and provide oversight for the co-investment portion of the CPE businesses.
The CPE businesses, which include investments in private equity funds, co-investments in buy-outs and mezzanine investments in middle market companies, are managed by professionals who have invested about $2 billion on behalf of Citi's proprietary accounts and about $8 billion for third-party clients. Citigroup said that "a significant number" of CPE professionals are expected to join StepStone and Lexington, while some will remain at Citigroup.
Citigroup said it will retain its management of, and certain proprietary interests in, its employee funds. The company noted that the transaction does not impact Citi Capital Advisors, which is part of Citigroup's core business segment, Citicorp.
Mark Mason, Chief Operating Officer of the Citi Holdings segment at Citigroup, said, "Citi has an established and successful relationship with StepStone, and Lexington is a highly regarded co-investment manager in the industry. We believe the combination of StepStone, Lexington and the CPE team are well qualified to manage these assets."
Citigroup is selling buyout investments made under its decade-old Citi Private Equity unit, which was put up for sale last year. Citi Private Equity, which was formed in 2000 and had about $10 billion under management as of January 2010, including the firm's own investments, was among more than two dozen businesses that Citigroup CEO Vikram Pandit identified for sale or eventual closure in early 2009.
New York-based Lexington Partners has more than $18 billion of capital under management, according to the New York-based firm's website. Since 1990, Lexington has acquired secondary and co-investment interests in private equity through nearly 400 transactions with a total value in excess of $12 billion. The company is seen as among the more prominent players in the secondary private-equity market, in which investors buy second-hand interests in private-equity holdings, typically at a discount to their face value.
La Jolla, California-based StepStone advises institutions on private equity investments. The company's clients include the Kuwait Investment Authority, New York State Teachers' Retirement System and State of Wisconsin Investment Board, according to the company's website.
The Citi funds require ongoing management services because in addition to investing its own money, Citigroup sold interests in the funds to clients of its private bank and its Smith Barney brokerage arm, as well as to Citigroup's own employees. StepStone reportedly came into the process partly due to an existing contract to manage certain Citi pension assets. In February, the company added Johnny Randel as its CFO and COO, after he had served in a similar capacity with Citi Private Equity.
Monte Brem, Chief Executive Officer of StepStone, said, "The agreement to manage the CPE businesses is a significant expansion of StepStone's private equity investment management activities and capabilities. The CPE businesses are an ideal fit with our fiduciary management and back-office services, adding highly experienced and effective monitoring, reporting and investment teams to our StepStone professionals."
Citigroup does not publicly disclose the performance of Citi Private Equity, which specialized in investing in other managers' buyout funds. Managers of such funds typically charge fees for overseeing investors' money and take a fixed cut of any capital gains.
Citigroup, currently 18% owned by the U.S. Treasury Department, agreed in April to sell a hedge-fund unit including $4.2 billion of assets to private alternative-investment firm SkyBridge Capital LLC. In March, the bank agreed to sell Citi Property Investors, a real estate investment unit with a net asset value of $3.5 billion, to private equity firm Apollo Management LP.
In Tuesday's regular trading session, C is trading at $4.24, up $0.12 or 3.04% on a volume of 239.80 million shares. The stock has been trading in a range of $2.56-$5.43 in the past 52 weeks.
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