Citigroup Inc. will take $9 billion onto its already-bulging balance sheet as it will close a hedge fund co-founded by Chief Executive Vikram Pandit, 11 months after Citigroup bought the fund's management company for more than $800 million.
Citigroup will shut the fund, which has been dogged by mediocre returns and the loss of top managers, and buy what is left of its assets "at fair value." The move will enable Old Lane to facilitate client redemptions at July 31, Citigroup said.
"These steps will maximize the synergies and talent that are housed within Old Lane and are consistent with Citi's continuing effort to optimize resources," said Ned Kelly, president and chief executive of Citi Alternative Investments.
All former Old Lane individual partners, including Pandit and other senior Citi executives, will be required to maintain their investments in Old Lane funds or other designated Citi alternative funds.
Pandit personally reaped at least $165 million when Citigroup bought Old Lane, founded in 2006. Many large banks and brokerages recently saw hedge funds as a lucrative new business, and Citigroup was also willing to pay a premium to land Pandit, who quickly moved up the ladder and became chief executive in December.
But as the fund struggled, Citigroup was forced to choose between pumping new money into it or shutting it down. That created an awkward situation for the new CEO. Pandit removed himself from the deliberations to avoid the perception of a conflict of interest.
Citigroup officials considered a plan to replenish Old Lane with anywhere from $1 billion to $3 billion of the bank's own capital. In a memo last month, Old Lane's CEO, Guru Ramakrishnan, told trading partners and lenders that the fund had secured a "substantial" amount of fresh capital, according to people who saw the document.
The memo was premature. Citigroup later decided against an infusion, in part because its resources were too strained to devote new capital to Old Lane, people familiar with the situation said. Pummeled by falling housing prices and the credit-market mess, the bank has reported losses of nearly $15 billion for the past two quarters, forcing it to make layoffs and other cutbacks. Citigroup has responded to those losses by raising about $39 billion in capital since last November.
Old Lane was one of the biggest hedge funds to open its doors in 2006, boasting in marketing materials that it raised $4 billion in fewer than nine months. The list of marquee investors lined up by Pandit included Singapore's government investment fund and Harvard University's endowment.
At the time of its purchase by Citigroup, Old Lane had amassed about $4.5 billion in assets. Charles Prince, then Citigroup's CEO, touted the deal as "a unique opportunity to continue our growth in the highly competitive alternative investment area."
After the purchase was completed last July, Pandit took the helm of Citigroup's alternative-investments division, which offers hedge funds, private-equity funds and other products to sophisticated investors.