Wednesday, August 10, 2022

Why The World’s Oldest Sovereign Fund Is in Turmoil: QuickTake

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Kuwait’s sovereign wealth fund, the world’s oldest and one of the largest, has played a key role in preparing OPEC’s fourth-largest producer for a post-oil future and helping prop up the economy as it was battered by the pandemic. The $769 billion Kuwait Investment Authority is also a leading global investor, with holdings in BlackRock Inc. and Mercedes-Benz Group AG. In a rare move, it ousted the head of its London arm in July, sending shock waves through the normally sedate and secretive world of Gulf sovereign funds. 

1. Why was the fund set up? 

The Kuwait Investment Board was established in London in 1953, eight years before the nation gained independence, to invest surplus oil revenue and help diversify the economy. The board was later replaced by the Kuwait Investment Office, and in 1982 the KIA was set up as its parent entity. The KIA controls Kuwait’s General Reserve Fund, which is the main repository of oil revenues and pays out budget expenditures. In addition, it manages the Future Generations Fund, which is meant to safeguard the nation’s wealth for a time after its oil runs out and whose assets have grown to more than $700 billion. The KIA is overseen by a board that includes the finance and oil ministers.

2. What does it invest in?

The KIA is the second-biggest sovereign wealth fund in the Gulf region, with a significant proportion of its investments in the US. During the 2008 crisis, it bought into banks including Citigroup Inc. KIO, its London arm, has been a prolific investor in the past year and participated in the US listing of private equity firm TPG Inc. Unlike parent KIA, the KIO mainly invests directly, predominantly in public equities and fixed income. The KIA owns stakes in ports, airports and power distribution systems globally, as well as in regional firms including Mobile Telecommunications Co., National Hotels, and Kuwait Telecommunications Co. KIA Managing Director Ghanem Al-Ghenaiman has said the fund is on the lookout for opportunities in real estate, energy and IT. 

3. Why are sovereign funds such important global investors?

Gulf countries have plowed billions of dollars into investments around the world to diversify their economies and sovereign wealth funds have played a key role. The region’s seven biggest funds have assets worth more than $3 trillion, including stakes in some of the world’s biggest companies. They’ve been particularly active this year amid broader market volatility, and have been part of at least $28.6 billion worth of acquisitions outside the Middle East and Africa — the most for any corresponding period on record. At home, Kuwait’s fund plays an even more important role — the government has been forced to rely on its General Reserve Fund for financing as it’s been unable to tap global markets since its debut Eurobond in 2017.

4. What happened at the KIA?

The fund ousted the head of its London arm, Saleh Al-Ateeqi, and asked him to leave without serving the standard three-month notice period. A former McKinsey & Co. partner, Al-Ateeqi was hired in 2018 to modernize the KIO. He increased its assets, hired executives including a chief investment officer, but is also said to have clashed with some long-tenured employees. Hussain Al-Halabi, has since been appointed to head the UK branch. He previously worked at the St Martins Property Group, the KIA’s London-based real estate investment firm. The KIO manages a third of the KIA’s total assets, according to people with knowledge of its finances.  

5. How may the KIO strategy change under its new chief?

Under Al-Halabi’s leadership, the fund is likely to return to its conservative roots and ditch many of the performance-related practices brought in by Al-Ateeqi, according to two people with knowledge of the fund, who spoke on condition of anonymity because they aren’t authorized to comment. The saga could end up in court, with Al-Ateeqi having filed a complaint with Kuwait’s general prosecutor against the country’s finance minister, who oversees the KIA. Al-Ateeqi claims authorities refused to dismiss an employee he suspected of spying on the wealth fund. The employee denied the allegations and accused Al-Ateeqi of mismanagement. Separately, three former KIO employees have filed a case against the fund in London claiming unfair dismissal, age discrimination and whistle-blowing.

(An earlier version of the story was corrected to show the Kuwaiti fund is one of the world’s largest)

More stories like this are available on bloomberg.com



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