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McKinsey’s secret $5 billion fund in spotlight

McKinsey, one of the world's most influential consulting firms, has built up a secretive $5 billion internal investment arm that manages the fortunes of its past and present partners, raising questions over possible conflicts of interest.

Known as McKinsey Investment Office Partners, it is overseen by a 12-strong board of the consultant's most senior partners and advisers, according to documents seen by the Financial Times.

The firm's partners on the board — which include 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 they are not named on MIO's website.

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 McKinsey insiders. Ex-partners at the prestigious firm have gone on to run some of the world's largest companies or have taken up important government positions.

"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," said Fiona Czerniawska, director of Source Global Research, an authority on the consulting industry.

MIO said the board delegated investment decisions to the division's management, adding that it had "a rigorous policy to avoid conflicts of interest".

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The little-known partners' 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, according to an investor.

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

"MIO is managed independently, and all its activities are separate from McKinsey's consulting operations," McKinsey said.

In its fund documents MIO said it was permitted to make investments in the securities of companies for which McKinsey acted as a consultant.

One disclosure stated: "MIO's parent, McKinsey, is an internationally recognised consulting firm that has a variety of business engagements with numerous issuers of securities," and that MIO's funds were "not required to refrain from investing in such issuers".

MIO said it was regulated by the US's Securities and Exchange Commission and the UK's Financial Conduct Authority.

The McKinsey investment fund employs 80 people in several countries — rivaling some of the world's largest hedge funds in terms of personnel and assets under management. Its offices and IT systems are separate from those of McKinsey's consulting business to avoid any possible leakage of information between the two operations.

MIO makes use of sophisticated proprietary trading strategies and external hedge fund and private equity managers, and has seeded some of these funds with its own capital.

The fund does not invest directly in publicly quoted securities, but has specialized in macro strategies as well as complicated illiquid trades alongside hedge funds including Elliott Management and Paulson & Co.

In 2014 it made 14 per cent for McKinsey partners, compared with a 3 per cent average for hedge funds in the same year.