Citi has entered into a definitive agreement to transfer the management and certain proprietary interests in its fund of funds, mezzanine funds, feeder funds and co-investment businesses (the CPE businesses) to StepStone Group and Lexington Partners.

As part of the agreement, StepStone, a provider of customized private equity investment management and advisory services, will provide ongoing management and advisory services for the CPE businesses’ $4bn fund of funds, feeder and co-investment funds.

Lexington, a private equity sponsor, will acquire a portion of Citi’s proprietary capital investments in the various funds and provide oversight for the co-investment portion of the CPE businesses.

The CPE businesses, which include investments in private equity funds, co-investments in buy-outs and mezzanine investments in middle market companies, are managed by professionals who have invested approximately $2bn on behalf of Citi’s proprietary accounts and approximately $8bn for third-party clients. A significant number of CPE professionals are expected to join StepStone and Lexington and some will remain at Citi.

Terms of the transaction, which is expected to close early in the fourth quarter of 2010, were not disclosed.

This transaction is part of Citi’s strategy to reduce the assets and businesses within Citi Holdings, its portfolio of non-core operating businesses and assets.

Citi said it will continue to pursue opportunities to divest non-core assets in a manner that optimizes the value of those assets for shareholders. Upon completion, this transaction will reduce GAAP assets in Citi Holdings by approximately $1.1bn.

Mark Mason, COO of the Citi Holdings segment at Citi, said: “Citi has an established and successful relationship with StepStone, and Lexington is a highly regarded co-investment manager in the industry. We believe the combination of StepStone, Lexington and the CPE team are well qualified to manage these assets.”