McKinsey's secret $5-billion fund in spotlight: Financial Times

The FT report said the existence, size and investments of the highly profitable internal trading fund, which was set up three decades ago, have until now remained largely unknown outside a circle of former and current insiders

The Financial Times has reported that consulting firm McKinsey has built a $5-billion internal investment arm, McKinsey Investment Office Partners (MIO), to manage past and present partners' wealth, raising questions over possible conflicts of interest.

When contacted, a McKinsey spokesperson said: "McKinsey is a values-based firm and takes professional standards extremely seriously. MIO manages the pensions of current and former McKinsey employees and assets of partners and former partners. There is no conflict of interest. MIO is managed independently, and all its activities are separate from McKinsey's consulting operations, for example having separate offices and IT systems. MIO operates on a 'blind trust' basis, with MIO's investment managers being unaware of the firm's clients and consultants being unaware of MIO's underlying investments."
 

MIO is regulated by the US Securities and Exchange Commission and the UK's Financial Conduct Authority. "The MIO board does not make investment decisions, which are delegated to MIO management. MIO does not invest directly in individual public company securities. The board also ensures a rigorous policy to avoid conflicts of interest is in place and enforced," the McKinsey spokesperson said. A McKinsey insider said the FT article is carefully written not to imply any form of conflict of interest either on the part of McKinsey or MIO.

The FT report said MIO is overseen by a 12-member board of the consultant's most senior partners and advisors. The firm's partners on the board of the fund, including the heads of the Americas, energy, investment banking, and private equity divisions, do not disclose their work at the fund in their corporate biographies and are not named on MIO's website. McKinsey was founded in 1926 in Chicago. It currently employs over 20,000 people worldwide, and is owned by 1,400 partners.

The firm was rocked by a scandal when its former managing director, Rajat Gupta, was jailed for two years in the US for passing on insider information on Goldman Sachs investments to Raj Rajaratnam, a hedge fund owner. Rajaratnam is currently serving an 11-year sentence for insider trading.

The FT report said the existence, size and investments of the highly profitable internal trading fund, which was set up three decades ago, have until now remained largely unknown outside a circle of former and current insiders. Ex-partners at the firm have gone on to run some of the world's largest companies or have taken up important government positions.

The business daily quoted several experts claiming there is indeed a conflict of interest. "Given the size of the internal investment fund, it raises the question of whether there's a conflict of interest here between McKinsey's investment strategy and its clients' needs," Fiona Czerniawska, director, Source Global Research, told FT. The newspaper quoted an example of an investment by MIO in National Bank Holdings in 2012 whose chairman, Frank Cahouet, was a former client and had hired from the consultant.

The investment group was designed to retain McKinsey's top talent and has generated hundreds of millions of dollars in profits for its clients over three decades. Its flagship offering, called Compass Special Situations, has made money for 24 of the past 25 years - only suffering a loss at the height of the global financial crisis in 2008, an investor told FT.

MIO has total assets of $9.5 billion - around half are partner investments and the rest is invested on behalf of the McKinsey group pension plan.