What’s happening at Kuwait Investment Authority?

The London office of the Kuwaiti sovereign wealth fund has lost its alternatives head and sold a raft of European fund stakes amid a Brexit-inspired audit by head office.

Middle Eastern sovereign wealth funds are often sealed units; it is not always clear how they go about achieving their returns. Kuwait Investment Authority, the world’s oldest sovereign fund, is perhaps the most mysterious of all.

Unlike most of its regional counterparts, the six-and-a-half-decade-old KIA has largely avoided trophy assets, gaining a reputation for making cautious, solid investments in a way that attracts as little attention as possible. The fund has $592 billion in assets under management, according to PEI data. One of its most high-profile is a 6.8 percent stake in German car maker Daimler AG.

This conservative approach is clear in its private equity strategy, to which 10 percent of its assets are allocated. KIA does not invest in any North America fund below $1.5 billion in size, any emerging markets fund below $1 billion and any European fund below €2 billion, according to its website.​

But recent events at London subsidiary the Kuwait Investment Office, which runs the fund’s European private equity operations, have drawn the market’s attention.

In June head of alternative investments Charles Magnay left the fund after around four years in the post, according to a source familiar with the fund. His next moves are not clear and his LinkedIn profile lists him only as an experienced private equity fund investor. Around the same time Calum Daniel, a vice-president in the private equity funds and co-investments team, left for Tesco Pension Investment after nearly three years in the job, the same source said.

In October, sister publication Secondaries Investor reported that KIA had offloaded a portfolio of European buyout fund stakes to secondaries buyers Coller Capital and Glendower Capital, including stakes in the €11.2 billion, 2007-vintage Apax Europe VII, the 2008-vintage €2.7 billion PAI Europe V and the 2006-vintage, €963 million Duke Street VI.

A source familiar with the transaction said that the sale was in line with a change in KIA’s strategic direction and “major changes” being made in relation to its London office.

The plot thickened on 4 October when KUNA, Kuwait’s state news agency, reported that the Gulf nation’s State Audit Bureau was to “intensify” the inspection of its London office “due to Brexit and the expected economic repercussions”.

There is a broader context to consider. In February KIA’s executive director of alternative investments Farouk Bastaki was promoted to managing director of the sovereign wealth fund. He has yet to be replaced.

In January the man he replaced at the top, Bader Al-Saad, told a panel at the World Economic Forum in Davos that the KIA was to increase the amount of total assets managed in house to as much as 8 percent from around 1-2 percent, adding that the fund needed take more risks in order to maintain returns.

What this all adds up to is not clear. A general partner source with an existing relationship with the KIA suggests that the departure of Magnay presented a good opportunity for the KIO to do some “spring cleaning”. The source was not aware of any strategic change beyond that.

Another source told PEI that that relationship between the Kuwait and London offices has been fraught for some time, with head office annoyed by the UK office’s perceived tendency to “do its own thing”. In carrying out an audit of operations, head office may be trying to reassert control, the source suggested.

The machinations of the KIA, which refused to comment, remain as mysterious as ever. Speculation about the fund’s London office, and its whole approach to alternatives investment, will remain.