Citigroup is closing a secretive $1 billion principal investing desk. The group faced stiff competition from a surge in private lenders with troves of dry powder.

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Michael Corbat, chief executive officer of Citigroup Inc., listens during a House Financial Services Committee hearing on April 10, 2019 in Washington, DC. Seven CEOs of the country's largest banks were called to testify a decade after the global financial crisis.

• A little-known principal investing team at Citigroup is being wound down, and the executive who led the group has left the firm, according to people familiar with the matter.
• What remains of Citi Credit Opportunities, a vestige of pre-financial crisis banking that had $1 billion in balance sheet to make loans to small- and mid-size companies, is being absorbed into the bank's broader financing operation.
• John Peruzzi, a nearly two-decade Citi veteran who led the team, has left the firm.
• The boom in buyside private-lending shops combined with a prolonged run of low-interest rates has made this type of business more difficult and less lucrative for banks than in years past.
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The head of a little-known principal investing team at Citigroup that had $1 billion in firepower to make loans to small- and mid-size companies has left the bank, and the standalone team will no longer exist.

What's left behind of Citi Credit Opportunities, a vestige of pre-financial crisis banking, is being absorbed into the bank's broader financing operation, with some employees leaving the firm and others being reassigned to new teams, according to people familiar with the matter.

A boom in private-lending firms, which continue to crowd out banks from once-lucrative territory that they owned, as well as a long drought in credit yields contributed to the latest organizational shake-up at Citi.

But the credit opportunities group was also something of an anomaly within the bank: The firm's Institutional Clients Group is focused on covering larger, more established firms, whereas this team directly invested in much smaller companies that, for instance, worked in autobody repair, IT services, and plastics manufacturing.

John Peruzzi, a nearly two-decade Citi veteran, ran the division, which was formed in 2008 as an outgrowth of the bank's pre-crisis "Global Special Situations Group." He's left the firm, according to people familiar with the matter.

"Consistent with our institutional client-focused strategy and in line with current market conditions, we have merged the credit opportunities team into our financing business to help drive growth and better serve our clients," Citi spokesman Scott Helfman said in a statement.

He declined to comment on Peruzzi's job status. Peruzzi did not respond to multiple inquiries.

See more: Goldman Sachs execs are jockeying for power in the firm's big new private investing unit - and the stakes couldn't be higher

While Citigroup underwent a massive overhaul after financial crisis and shed a pile of noncore businesses, the firm retained its Credit Opportunities team, which was allocated $1 billion in balance sheet to make riskier loans to middle-market companies.

These investments spanned across industries and could take a variety of forms, from acquisition finance to leveraged buyouts to recapitalizations. The bank would commonly cut checks in the $10 million to $50 million range and band together with other investors on larger deals.

The Credit Opportunities group appears to have kept a low profile since its formation. Business Insider couldn't find mention of the group in public company filings nor in media reports going back more than a decade, based on a search of the SEC database and several news media archives.

One former insider described the team as primarily focused on first and second-lien tranches of well-underwritten debt for companies that wouldn't have been appropriate for the mandate of Citi otherwise, given the firm's focus on large, multinational companies. Deals were intended to generate sufficient enough returns to make them worthwhile without cross-selling to other products in the investment bank, the person said.

Companies the group lended to, according to Pitchbook, include Technimark, a plastics manufacturer based out of North Carolina; Caliber Collision, an autobody repair and paint shop based out of Texas; and Curvature, an IT services firm based out of Charlotte.

But as regulators have ramped up scrutiny of megabanks, a cast of private lenders have entered the fray, amassing giant troves of dry powder to throw at these types of investments.

The emergence of new, well-capitalized competitors like private-equity firms and business-development corporations, combined with a multi-year low-interest rate environment that has had investors hunting high and low for yield, made the math more difficult for Citi's comparatively small Credit Opportunities group, sources say.

"Over the years with the continued compression of spreads and the radical expansion of private lending platforms on the buy-side outside of banks, along with regulatory scrutiny, all of those things over time made that business more and more difficult," a former insider said.

What remains of the group will be absorbed by Mitali Sohoni, the global head of credit total-return swaps and financing.

Reassigned employees will no longer make direct loans to companies, sources said, but will instead focus on lending to buyside shops that make such investments - allowing these investors to add leverage to their portfolios and reduce their equity commitments.

See more: A $1.5 billion credit trade, a seismic market change, and a brand-new trading desk: How Bank of America learned to stop worrying and love the bond ETF.

That's more in keeping with Citi's broader strategy of leveraging its global network to provide banking services to the world's largest corporations, financial institutions, and government entities.

Citi has been overhauling its markets division in 2019 after Paco Ybarra's promotion to head of the Institutional Clients Group in April, which followed the retirement of Jamie Forese.

Carey Lathrop and Andy Morton were promoted to co-run markets in place of Ybarra.

Last month, Citigroup revamped its stock-trading operations, combining its equities division with its prime, futures, and securities services division - a structure that more closely mirrors Wall Street competitors.

In June, the bank merged its rates and currencies operations, two of its top moneymakers in sales and trading.

The bank is simultaneously undergoing a significant reduction in force in the markets division, with up to 400 planned cuts, including 10% of the headcount in equities.