Citigroup Inc. had what looked like the perfect way to grab a slice of the money flowing from wealthy individuals to private equity firms: playing matchmaker between its rich clients and an up-and-coming firm.
More than a decade after its 2012 launch, Citi’s experiment has ended with disappointed billionaires, a bitter legal battle and a lesson on the pitfalls of marketing private assets.
The saga revolves around the creation of the Silverfern Equity Club, the product of a partnership between Citi and Silverfern Group that was championed by Chief Executive Officer Jane Fraser back when she led Citi’s private bank. The club was designed to offer exclusive investment opportunities to a few dozen elite clients; Silverfern brought the expertise, Citi brought the customers, and the two would split the fees.
Emails, documents and testimony from years of litigation recount how Citi viewed the Silverfern Equity Club as a possible model for the future. By 2016, though, strains began to appear in the partnership, and internal communications show Citi bankers started to sour on Silverfern as customers complained about poor performance. The club shut down and lawsuits followed, along with a trial that commenced last September. On Feb. 27, a New York judge ruled that Silverfern owed Citi millions in fees that it had failed to pay.
A representative for New York-based Citigroup declined to comment. Neither Silverfern nor its lawyers responded to requests for comment; the firm is appealing the judge’s decision.
Partner Model
While the model failed for Citi, the challenge that the club was meant to address still exists today as Wall Street banks try to offer their high-value customers access to private markets while snagging some fees for themselves. Gaining more investment dollars is a key aim of a fresh revamp of Citi’s wealth unit under new head Andy Sieg. Specialists in private assets like Blackstone Inc. and KKR & Co. are making an even bigger push to tap wealthy individuals, with the money potentially up for grabs measured in the trillions.
The Silverfern club was an early attempt to harness those funds in a golden era for private equity. Silverfern would offer Citi’s top clients exclusive opportunities to invest in a flow of private equity deals, mainly co-investments with larger firms. In exchange for access to those clients, Silverfern was willing to give Citi half of its 2% annual management fee and a quarter of its 20% performance fee.
“We should take this offering to our largest clients and prospects in a systematic and thorough way,” Private Bank executive David Bailin wrote in a May 2012 memo emailed to Fraser. “We believe we can win new clients and gain new investment dollars from existing ones via Silverfern.”
Citi signed up 39 of its richest clients as club members with commitments of $470 million. These included billionaire dynasties in Europe and Mexico, a Hong Kong-based hedge fund manager who formerly led derivatives trading for a major bank and an Israel-based technology entrepreneur. Internal emails show Fraser explicitly wanted to target “big boy” clients who had their own due diligence capabilities.
Private Exposure
Then as now, Citi Private Bank primarily provides its clients with exposure to private equity through various funds managed by big names like Blackstone, TPG Inc. and Carlyle Group Inc. When clients invest in such funds, banks often make only a one-time referral fee, so the opportunity to win recurring revenue with a model like the Silverfern club was very attractive. Bailin highlighted this in his memo but stressed the bank would be making money “by doing what is best for our clients.”
Silverfern managed just $50 million in 2010, though it had already co-invested in deals led by Cerberus Capital Management, Oaktree Capital Management and others. Its founders, Clive and Reeta Holmes, also came to the club with impressive Wall Street credentials. Clive had been co-head of North American mergers and acquisitions at Deutsche Bank AG, while Reeta previously worked at Blackstone and Soros Fund Management.
At the time the club launched, big-name private equity firms were only getting started with direct outreach and relied on banks to be their distribution partners. But the threat was already well-recognized within Citi.
“The GPs, the private equity firms, were building up their private wealth distribution networks,” Citi Managing Director Mercedes Garcia-Ayuso testified during the Silverfern trial. “So, they were going directly to our clients.”
Tensions Arise
During their 2012 roadshow, the Holmeses were widely praised within Citi for their persuasive client presentations. But tensions quickly emerged. Citi wanted to offer a pick-and-choose buffet of opportunities to its richest clients, who were also able to participate with relatively small commitments. That didn’t sit well with Silverfern, which was under constant pressure from deal sponsors to meet its allocations.
Early on, Clive Holmes expressed annoyance that a club member described by a Citi banker as “worth 4x George Soros” was willing to put only $500,000 into the first Silverfern deal, a co-investment with Partners Group in oil-services firm O-Tex Holdings.
“My car cost more than this!” Holmes wrote in an August 2012 email to a Citi banker.
In March 2014, after Reeta defended an email she sent pointing out that a club member had participated in only one of four Silverfern deals, Bailin sent a separate message to Dan O’Donnell, another top private bank executive.
“She doesn’t think their approach is at all an issue,” he wrote. “It’s like they don’t know how to ‘make friends.’”
Some of Silverfern’s offerings were in the oil-and-gas sector, including investments in Sequitur Energy Resources and New Energy Venture along with O-Tex. Those three deals underperformed, with club members asked to provide follow-on investments in O-Tex and Sequitur or face dilution. Silverfern said at trial that this was part of broader downturn in the sector at the time.
Arm’s Length
For Citi, though, a major attraction of the Silverfern club was that the bank wasn’t responsible for performing due diligence on deals — it was just an intermediary — and emails show that bankers frequently reminded clients that they weren’t in a position to opine on the transactions. They nonetheless heard from clients disappointed by investments that didn’t go well.
Club members ultimately put only $220 million in Silverfern deals, less than half of their soft commitments, with a handful passing on all of them. The legal battle that erupted between Citi and Silverfern was mainly about what caused the shortfall. Citi said clients were unhappy with Silverfern and the performance of its deals. But Silverfern claimed the bank actively turned its clients against its smaller partner.
A tipping point came in 2016, when the Holmeses began pitching an arrangement to club members that was more like a fund. This was permitted under the deal with Citi, which would still have been entitled to fees. But in April of that year, O’Donnell sent a letter to all club members stating that Citigroup was not involved in the new offering and wouldn’t service it.
Chilling Effect
O’Donnell later testified that the letter was sent solely due to regulatory concerns, particularly in Asia. Silverfern didn’t see the letter at the time, but Clive said he believed it quickly had a chilling effect. “This was clearly Citibank distancing itself from Silverfern,” he testified.
One Hong Kong-based club member told his Citigroup bankers that he was turning down Clive’s pitch in large part because he valued the bank’s involvement.
“I explained that I like the oversight provided by Citi of all transactions for his small/medium sized PE firm,” the client said in a September 2016 email. “As I learnt Citi would not be involved going forward, I have declined, as this changes the risk return of investing with below top-tier PE managers.”
By late 2018, Silverfern had stopped paying Citi its share of the fees, and the two sides headed for court the following year. In the end, Judge Margaret Chan ruled that Citi’s letter to club members was neutral, the bank had satisfied its obligations to Silverfern, and that Citi was owed $9 million.
In the years since the club launched, private equity firms have grown more aggressive in directly courting wealthy individuals. Garcia-Ayuso, who now leads Citi’s investment counseling team for much of Latin America, seemed to reflect on that while on the stand in September.
“I mean, I look at the list of clients that were in the club,” she said. “I don’t think that any of them have done any private equity with us for a few years now.”
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