(Bloomberg) — Citigroup Inc. had what regarded like the right approach to seize a slice of the cash flowing from rich people to non-public fairness corporations: enjoying matchmaker between its wealthy shoppers and an up-and-coming agency.
Greater than a decade after its 2012 launch, Citi’s experiment has ended with upset billionaires, a bitter authorized battle and a lesson on the pitfalls of promoting personal property.
The saga revolves across the creation of the Silverfern Fairness Membership, the product of a partnership between Citi and Silverfern Group that was championed by Chief Government Officer Jane Fraser again when she led Citi’s personal financial institution. The membership was designed to supply unique funding alternatives to a couple dozen elite shoppers; Silverfern introduced the experience, Citi introduced the purchasers, and the 2 would cut up the charges.
Emails, paperwork and testimony from years of litigation recount how Citi seen the Silverfern Fairness Membership as a attainable mannequin for the longer term. By 2016, although, strains started to appear within the partnership, and inside communications present Citi bankers began to bitter on Silverfern as prospects complained about poor efficiency. The membership shut down and lawsuits adopted, together with a trial that commenced final September. On Feb. 27, a New York choose dominated that Silverfern owed Citi tens of millions in charges that it had did not pay.
A consultant for New York-based Citigroup declined to remark. Neither Silverfern nor its legal professionals responded to requests for remark; the agency is interesting the choose’s determination.
Associate Mannequin
Whereas the mannequin failed for Citi, the problem that the membership was meant to handle nonetheless exists at present as Wall Road banks attempt to supply their high-value prospects entry to non-public markets whereas snagging some charges for themselves. Gaining extra funding {dollars} is a key intention of a recent revamp of Citi’s wealth unit underneath new head Andy Sieg. Specialists in personal property like Blackstone Inc. and KKR & Co. are making a fair greater push to faucet rich people, with the cash probably up for grabs measured within the trillions.
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The Silverfern membership was an early try and harness these funds in a golden period for personal fairness. Silverfern would supply Citi’s prime shoppers unique alternatives to put money into a stream of personal fairness offers, primarily co-investments with bigger corporations. In change for entry to these shoppers, Silverfern was prepared to present Citi half of its 2% annual administration price and 1 / 4 of its 20% efficiency price.
“We should always take this providing to our largest shoppers and prospects in a scientific and thorough approach,” Non-public Financial institution government David Bailin wrote in a Might 2012 memo emailed to Fraser. “We imagine we are able to win new shoppers and acquire new funding {dollars} from current ones through Silverfern.”
Citi signed up 39 of its richest shoppers as membership members with commitments of $470 million. These included billionaire dynasties in Europe and Mexico, a Hong Kong-based hedge fund supervisor who previously led derivatives buying and selling for a significant financial institution and an Israel-based expertise entrepreneur. Inner emails present Fraser explicitly needed to focus on “huge boy” shoppers who had their very own due diligence capabilities.
Non-public Publicity
Then as now, Citi Non-public Financial institution primarily supplies its shoppers with publicity to non-public fairness via numerous funds managed by huge names like Blackstone, TPG Inc. and Carlyle Group Inc. When shoppers put money into such funds, banks typically make solely a one-time referral price, so the chance to win recurring income with a mannequin just like the Silverfern membership was very enticing. Bailin highlighted this in his memo however careworn the financial institution can be creating wealth “by doing what’s finest for our shoppers.”
Silverfern managed simply $50 million in 2010, although it had already co-invested in offers led by Cerberus Capital Administration, Oaktree Capital Administration and others. Its founders, Clive and Reeta Holmes, additionally got here to the membership with spectacular Wall Road credentials. Clive had been co-head of North American mergers and acquisitions at Deutsche Financial institution AG, whereas Reeta beforehand labored at Blackstone and Soros Fund Administration.
On the time the membership launched, big-name personal fairness corporations have been solely getting began with direct outreach and relied on banks to be their distribution companions. However the menace was already well-recognized inside Citi.
“The GPs, the personal fairness corporations, have been build up their personal wealth distribution networks,” Citi Managing Director Mercedes Garcia-Ayuso testified in the course of the Silverfern trial. “So, they have been going on to our shoppers.”
Tensions Come up
Throughout their 2012 roadshow, the Holmeses have been extensively praised inside Citi for his or her persuasive shopper displays. However tensions shortly emerged. Citi needed to supply a pick-and-choose buffet of alternatives to its richest shoppers, who have been additionally capable of take part with comparatively small commitments. That didn’t sit nicely with Silverfern, which was underneath fixed stress from deal sponsors to satisfy its allocations.
Early on, Clive Holmes expressed annoyance {that a} membership member described by a Citi banker as “price 4x George Soros” was prepared to place solely $500,000 into the primary Silverfern deal, a co-investment with Companions Group in oil-services agency O-Tex Holdings.
“My automobile price greater than this!” Holmes wrote in an August 2012 e mail to a Citi banker.
In March 2014, after Reeta defended an e mail she despatched stating {that a} membership member had participated in solely certainly one of 4 Silverfern offers, Bailin despatched a separate message to Dan O’Donnell, one other prime personal financial institution government.
“She doesn’t assume their strategy is in any respect a difficulty,” he wrote. “It’s like they don’t know methods to ‘make associates.’”
A few of Silverfern’s choices have been within the oil-and-gas sector, together with investments in Sequitur Power Assets and New Power Enterprise together with O-Tex. These three offers underperformed, with membership members requested to supply follow-on investments in O-Tex and Sequitur or face dilution. Silverfern mentioned at trial that this was a part of broader downturn within the sector on the time.
Arm’s Size
For Citi, although, a significant attraction of the Silverfern membership was that the financial institution wasn’t liable for performing due diligence on offers — it was simply an middleman — and emails present that bankers incessantly reminded shoppers that they weren’t ready to opine on the transactions. They nonetheless heard from shoppers upset by investments that didn’t go nicely.
Membership members in the end put solely $220 million in Silverfern offers, lower than half of their comfortable commitments, with a handful passing on all of them. The authorized battle that erupted between Citi and Silverfern was primarily about what precipitated the shortfall. Citi mentioned shoppers have been sad with Silverfern and the efficiency of its offers. However Silverfern claimed the financial institution actively turned its shoppers in opposition to its smaller accomplice.
A tipping level got here in 2016, when the Holmeses started pitching an association to membership members that was extra like a fund. This was permitted underneath the take care of Citi, which might nonetheless have been entitled to charges. However in April of that 12 months, O’Donnell despatched a letter to all membership members stating that Citigroup was not concerned within the new providing and wouldn’t service it.
Chilling Impact
O’Donnell later testified that the letter was despatched solely attributable to regulatory considerations, notably in Asia. Silverfern didn’t see the letter on the time, however Clive mentioned he believed it shortly had a chilling impact. “This was clearly Citibank distancing itself from Silverfern,” he testified.
One Hong Kong-based membership member instructed his Citigroup bankers that he was turning down Clive’s pitch largely as a result of he valued the financial institution’s involvement.
“I defined that I just like the oversight supplied by Citi of all transactions for his small/medium sized PE agency,” the shopper mentioned in a September 2016 e mail. “As I learnt Citi wouldn’t be concerned going ahead, I’ve declined, as this modifications the chance return of investing with under top-tier PE managers.”
By late 2018, Silverfern had stopped paying Citi its share of the charges, and the 2 sides headed for court docket the next 12 months. In the long run, Decide Margaret Chan dominated that Citi’s letter to membership members was impartial, the financial institution had happy its obligations to Silverfern, and that Citi was owed $9 million.
Within the years for the reason that membership launched, personal fairness corporations have grown extra aggressive in immediately courting rich people. Garcia-Ayuso, who now leads Citi’s funding counseling crew for a lot of Latin America, appeared to mirror on that whereas on the stand in September.
“I imply, I have a look at the checklist of shoppers that have been within the membership,” she mentioned. “I don’t assume that any of them have executed any personal fairness with us for a couple of years now.”
