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AIG hires Citi exec as $30bn alternatives business hangs in balance

Amid the turmoil of its parent company, AIG's investment arm continues its Asian expansion with the hiring of Michael Chae. The fate of the firm’s substantial private equity and real estate businesses remains uncertain.

AIG Investments, the private equity and real estate business of the American insurance giant, has appointed Michael Chae to help guide the firm's expansion of its alternative investments in Japan.

As AIG scrambled to raise capital after its rating was downgraded by Standard & Poor's and Moody's Investors Service yesterday, AIG Investments said they were hiring Chae to focus on private equity and distressed securities. “AIG Investments is looking to build their alternative investment capabilities in Japan, where they haven’t had a presence in the past,” an AIG Investments spokeswoman said. “We’re in the process of assessing demand and where AIG Investment’s expertise will fit in the market.”

The company wouldn’t comment about what specific sectors it is exploring. The spokeswoman also declined to comment on how the financial situation of the parent company, AIG, could impact the planned expansion in Japan. 

AIG Investments includes the AIG Global Real Estate arm, which as of June this year had $25.7 billion (€18.1 billion) in equity under management, comprising 53 million square feet of retail, residential, industrial, office and hospitality properties in more than 50 countries. AIG Global Real Estate is based in New York, with offices in 35 countries. It is currently led by Kevin Fitzpatrick.

AIG has made no mention of whether it would put AIG Investments up for sale as a last-ditch effort to raise capital. Along with the International Lease Finance Corporation (ILFC), AIG’s plane leasing business, AIG Investments forms a relatively bright spot in the parent company’s portfolio. For the second quarter of 2008, as AIG posted a net loss of nearly $5.4 billion, its asset management division posted operating income before net realised capital gains/losses of $150 million. However, its institutional asset management division, which includes its private equity activities, reported a $27 million operating loss stemming from lower carried interest revenues, real estate investment gains and partnership income.

AIG Investments’ parent company has been under extraordinary pressure to raise capital as losses mounted within its insurance investment portfolio, which is heavily exposed to various residential mortgage-backed securities as well as credit default swaps collateralized by structured finance vehicles such as collateralized debt obligations (CDOs). The resultant collateral posting and capital needs of holding such instruments put pressure on the company to raise capital, which was exacerbated by the fact that the firm has nearly $50 billion of debt that may need to be rolled over in the next 12 months.

Among the alternatives that the world’s largest insurer considered was a capital infusion of between $10 billion to $20 billion from financial sponsors JC Flowers, Kohlberg Kravis Roberts and TPG. JC Flowers, which focuses on financial services firms, reportedly offered $8 billion in preferred shares to AIG but the company turned down the offer since it also included an option to buy the entire insurer for a discounted price in the future.