November 30, 2023

Investment Banking

Let Your Investment Banking Do The Walking

Citigroup Courts Private Equity Firms in Leveraged Finance Push

(Bloomberg) — Citigroup Inc. wants a bigger piece of that decades-old Wall Street favorite: the leveraged buyout. 

The bank is looking to drum up more business with private equity firms to help finance their biggest acquisitions, according to Tyler Dickson, global co-head of banking, capital markets and advisory at Citigroup. The firm plans to add staff to its investment banking team focused on private placements and venture capital, where it’s already been beefing up hires, he said.

“It’s more important for us to have deeper, richer relationships with financial sponsors because they have unprecedented dry powder,” Dickson said in an interview. “Their reach across investing styles and geographies has expanded dramatically.”

The bank is hoping the push will boost returns in its investment banking division, where it — along with most of its peers — posted a first-quarter decline in revenue as market turmoil chilled the pace of initial public offerings and debt capital markets activity. Citigroup even dispatched almost a dozen bankers to the Milken Global Institute Conference in Beverly Hills this week — a congregation of the world’s investing elite — to hunt for business. 

Buyout firms amassed a record $1.2 trillion of dry powder in 2021 as high valuations for targets kept potential buyers on the sidelines. Private equity firms typically augment that dry powder by borrowing from the world’s largest banks for acquisitions in a model that offers the potential for higher returns but at increased risk.

Heading into the financial crisis, Citigroup was the second-largest arranger of U.S. leveraged loans. But the crisis hobbled the bank, forcing it to ditch nearly $1 trillion of toxic assets and severely curtail its appetite for risk. By last year, it ranked eighth in the U.S. leveraged loan market, data compiled by Bloomberg shows.

That’s hurt Citigroup’s share in the broader debt capital markets business, which has dropped 80 basis points since 2017. In response, Citigroup is looking to make more money available for leveraged debt.

“We have suffered somewhat in our DCM franchise because of our conservative approach to the leverage finance market,” Paco Ybarra, head of Citigroup’s institutional clients group, said in March. “Recapturing share in leverage finance and capitalizing on the private asset opportunity will require us to increase our capital allocation to these sectors.”

Citigroup is wading deeper into leveraged finance as investors increasingly fear rising interest rates will sap borrower appetite for such loans. Lenders also have to account for how supply chain issues could complicate business plans and once-in-a-generation levels of inflation may curb demand for companies’ products.

“We don’t need to be in everything, we want to pick the situations where we know the sponsors,” Dickson said, speaking from the Milken conference. “In this risk environment, we’ll live within our means and look for the opportunities to execute our plan with a bias toward making sure we’re not too risky. We’re going to be patient.”

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