In an effort to comply with the Volcker Rule,
) will sell part of its stake in private-equity unit, Metalmark
Capital. Metalmark will cease to be an affiliate of Citigroup but
the banking major will continue to hold limited-partner interests
in the Metalmark Capital Partners II fund.
Incorporated in 2004 by the former management of Morgan Stanley
Capital Partners, Metalmark will be managed by the same
investment team after the stake sale by Citigroup. It was
previously domiciled under the Citi Capital Advisors division,
which has mostly been wind down by Citigroup.
Metalmark has $2.5 billion in committed capital in its latest
fund. The firm invests in companies in the energy and natural
resources sector as well as healthcare and industrial sectors.
Citigroup's decision to divest its stake in the private-equity
unit was taken to accord to the new regulations in the U.S.
banking sector. The most notable rule among these is the Volcker
Rule, which restrains banks from utilizing their own capital to
speculate - in a measure to prevent huge risky bets.
According to the Volcker Rule, banks will only be able to invest
a minimal amount of 3% of Tier 1 capital in hedge or
private-equity funds or can own 3% of the fund. Therefore, it
will not be possible for Citigroup to keep a significant stake in
the private equity unit.
Under pressure from the Volcker rule, Citigroup spun off an
internal hedge-fund unit earlier this year and renamed it Napier
Park Global Capital. Citigroup also sold its Citi Venture Capital
International unit to Rohatyn Group this year. Moreover, other
major U.S. banks like
JPMorgan Chase & Co.
The Goldman Sachs Group, Inc.
) have divested their hedge fund units in order to conform to the
The Volcker Rule has been the center of much debate as it poses a
challenge to the future profitability of banks. This rule will
definitely affect the top-line growth of banks.
Moreover, most industry players believe that the Volcker Rule
could lower market liquidity, raise transaction costs and divert
trading volumes to other jurisdictions, thereby making the whole
economy suffer. However, it should not be forgotten that the
primary aim of the Volcker Rule is to limit risky activities of
banks to safeguard taxpayers' money as well as the health of the
Currently, Citigroup carries a Zacks Rank #3 (Hold).
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