Citi Makes PE & Hedge Fund Investments Before Volcker Rule Takes Effect

Citi (NYSE:C) seems intent on continuing to invest in private equity and hedge funds despite restrictions from the implementation of the Volcker Rule in July of next year. The bank announced that it will invest $800 million of shareholder capital in its private-equity and hedge funds. ^[1] The Volcker rule, which was officially released to the public for comments last month intends to disallow such investments, often referring to these activities as “gambling” with shareholder money. Though the bank said that the investments were mostly “previously committed”, the move still comes as a surprise given the fact that Citi and competitors like Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE: GS) have cut down on proprietary trading operations in order to comply with the Volcker Rule (See Citi Shuts Another Prop Group as Banks Prepare for Volcker Rule). Citigroup responded to questions about the investment by mentioning that it more than made up for by the $1.1 billion it generated through the sale of separate hedge-fund and private-equity assets. ^[2]

We have a $40 price estimate for Citigroup’s stock, which is about 20% above the current market price. We are currently revising this estimate in light of the weak global economic outlook in the near future.

See our full analysis for Citi

Funds are going to Citi Capital Advisors

Citi Capital Advisors (CCA) provides investment solutions to select institutional and ultra-high-net-worth investors and has more than $18.8 billion in assets under management according to its website. Of this, about $5 billion is Citi’s own money while the rest is obtained from external sources.

The group seems to be capitalizing on the fact that the Volcker rule allows financial institutions to invest up to 3% of Tier 1 capital in such funds. The investment is clearly just a drop in the bucket relative to Citi’s total assets as demonstrated by the chart above, and an increase in the group’s assets under management by $800 million hardly makes a change to our price estimate for Citigroup’s stock. Nonetheless, it’s a curious activity going on in light of how much regulatory scrutiny is going on.

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1. Citigroup SEC Filing, Citigroup Website, Nov 4 2011 [↩]
2. Citigroup Puts $800 Million Into Buyout, Hedge Funds Even as Volcker Looms, Bloomberg, Nov 7 2011 [↩]