“What is to give light must endure burning.” – Viktor Frankl
“The backbone of surprise is fusing speed with secrecy.” – Carl von Clausewitz
Why is it coming out now, apparently months after the talks took place, that Blackstone inquired about buying a stake in Citadel?
There are a few reasons we can think of for monetizing coveted equity – or, at least showing enough leg to solicit an updated “mark” on the assets – but, the most likely one has been the same for years: Ken wants to become an investment bank.
Ok, so what does Citadel need to become an investment bank that it doesn’t already have?
Well, given leadership – and, occasional dominance – in listed equity-linked markets by Citadel, the next beachhead for investment banks-in-training is fixed income. And, Citadel-like prowess in fixed income may require lots of technology and smart folk, but the one thing it definitely needs is balance sheet.
The next question, then, is: Do you build a balance sheet or buy a balance sheet?
Now, the charts below – some of which are making their debut here on the Feed – provide solid evidence (even though Citadel does a damn good job of complicating the act of re-assembly) that Citadel has been consistently quite successful in building their own balance sheet. In the first of these charts, below, Alphacution presents the lineage of Citadel Securities’ total assets for the period beginning 2003 and ending 2018, wherein the latest figure clocks in at a respectable ~$75 billion (when including Citadel Clearing). As a comparison, the broker-dealer arms for Goldman Sachs and JP Morgan each boasted total assets north of $400 billion for 2018, however with only $32.4 billion and $52.4 billion of those larger figures allocated to equities, respectively, Citadel is much closer to being in the league on the equity-linked side.
We can also see, in the next two charts, the shift in product and asset class segmentation for Citadel Securities, LLC and Citadel Securities (Europe) Limited. In the past few years, starting with an out-of-the-blue spike in interest rate derivatives for the European entity (starting in 2015) and a similarly unique spike in debt securities on the balance for the US entity (starting in 2017), Citadel has been positioning as if they were making a strong move into fixed income.
So, if Citadel is doing such a bang up job growing its own balance sheet – and using that to build out their global franchise in fixed income, why deviate from the strategy by flirting with outside money?
The answer to that question is timing.
Chances are – at the time of these talks just a few months ago – Mr. Powell and the Fed were sharing guidance of additional interest rate increases. And, with rising rates (particularly from such still-depressed post-GFC levels) comes beefier opportunities in fixed income and interest rate derivative trading. With that expectation, Ken needed to build balance sheet faster than he could grow it organically. Hence, a little leg and a little dance with Blackstone.
When Mr. Powell got thumped to head the other direction on rates, Ken put his leg back in the holster and ended the flirtations with Blackstone…
All in, it’s a fascinating dynamic to keep an eye on…
UPDATE: Alphacution was interviewed for a recent story in Crain’s Chicago related to this topic, “Why Ken Griffin Could Be Shopping Around a Piece of His Business” (October 18, 2019). And, I agree with Citadel COO Gerald Beeson. Citadel is doing a very good job growing its own balance sheet.
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