Citigroup restarts business of lending to buyout funds

Bloomberg

Citigroup is ramping up lending to private equity and private credit groups, working to catch up with peers like JPMorganChase and Goldman Sachs after the bank spent years on the sidelines.

The bank told investors it wants to get back into a lending business it retreated from several years ago. Citigroup in the past year returned to offering loans backed by the cash that investors pledge to funds, according to people familiar with the situation, granted anonymity to discuss private matters.

As the bank pulled back on this kind of funding, known as subscription line financing, in 2022, rivals moved to pick up more business. Goldman Sachs, JPMorgan and PNC Financial Services scooped up large amounts of the debt from First Republic Bank and Signature Bank, which were big providers of the revolving loans before they failed or were rescued in 2023.

Citigroup's return comes as CEO Jane Fraser pushes to overhaul the bank and boost profits by generating more fee-based revenue and forging ties with alternative asset managers. Last year, the lender hired Vis Raghavan, a rainmaker from rival JPMorgan, to run its global banking business.

Subscription lines don't generate high margins, but they do help banks build relationships with asset managers, who may hire their lenders in the future to advise on acquisitions and underwrite junk bond sales. The lines have become popular among fund managers, used by nearly 85% of buyout funds last year, up from just a quarter a decade ago, according to data from MSCI. Altogether, the sublines business is estimated to be roughly $900 billion globally, law firm Dechert wrote last year.

The financing is helpful when dealmaking picks up, but it also provides liquidity during a slowdown, which asset managers have faced for years as transactions dried up and some of their bets haven't paid off.

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The threat of tighter standards under the previous White House led some large banks to exit capital-intensive lines of business. Regulators last year said they were going to ease rules known as Basel III Endgame, potentially freeing up space for banks to offer more financing.

Fraser wants to lift Citigroup's return on tangible common equity — a key measure of profitability — to 10% to 11% by the end of next year, bringing it more in line with its peers. Last quarter, that metric came in at 9.1%.

When private equity firms raise funds, their investors agree to provide cash to fund leveraged buyouts over time. But to access that money, managers have to make a "capital call." Subscription lines are backed by the promises to meet those calls.

Because investors have rarely defaulted on capital calls, subscription lines are seen as safe. Many banks have packaged them into securities, freeing up their balance sheets to make new loans.