Come Friday, one of Citigroup’s internal hedge fund units will begin a new life, free from its corporate parent and the restrictions that have come with new banking regulations.
What once was part of Citi Capital Advisors will now be known as Napier Park Global Capital, a $6.8 billion hedge fund, in one of the biggest spinoffs of a hedge fund from a major bank.
The move, months in the making, comes as Citi and other American banks divest themselves of businesses that are prohibited by the sweeping financial regulatory overhaul that is Dodd-Frank. One of the most prominent parts of the new law, the Volcker Rule, prevents these institutions from owning more than 3 percent of a hedge fund or private equity firm.
The spinoff is a new test for Jim O’Brien and Jonathan Dorfman, the Citi executives who will serve as Napier Park’s co-chief executives. But in some ways, it opens up new opportunities for the nascent firm and its more than 100 employees, especially since it may attract new clients who hesitated to invest in alternative-asset operations owned by banks.
That said, there may be a little bittersweetness in the parting.
“Citi has been a terrific parent and partner to us,” Mr. O’Brien told DealBook in an interview.
“It was fairly obvious to everyone nine months to a year ago that it would make the most sense to engage in a spinoff,” Mr. O’Brien said.
The talks between Napier Park and Citi went largely smoothly and amicably, he added, and required enormous amounts of paperwork.
Though the process was mostly drama-free, Mr. O’Brien acknowledged that he breathed a sigh of relief and gratitude when substantially all of the business’ investors agreed to the spinoff. He had guessed that perhaps 85 percent to 90 percent would give their consent over three to five months.
“I’m a natural pessimist,” he said.
Instead, the firm’s investors said yes within seven weeks, with the largest institutions agreeing very quickly.
What will emerge on Friday is a firm mostly owned by its employees that focuses on debt investments. Napier Park — named after John Napier, a Scottish mathematician who was a pioneer of logarithms, and the firm’s Park Avenue offices in Midtown Manhattan — runs hedge funds, managed accounts and specialized loan investment vehicles.
Citi isn’t completely letting go of its former unit from the outset. It will still retain a sizable minority position in the new firm, but will withdraw its capital over time, fully exiting by the July 2014 deadline stipulated by the Volcker Rule.
Mr. O’Brien and Mr. Dorfman said that they continue to see a number of opportunities for the firm to profit. Some of those have emerged from the new financial rules that gave rise to Napier Park’s independence, including the removal of banks and insurance firms as investors in complex debt because of new capital requirements.