McKinsey’s $9.5 Billion Internal Investment Arm Cuts Wide Swathby , , and
Investment unit started operating as MIO Partners in 1992
McKinsey says MIO business is run like a ‘blind trust’
McKinsey & Co. has a $9.5 billion internal investment arm that manages money for partners and former employees and invests in everything from start-ups to hedge funds that bet on mergers and acquisitions.
The unit, which started operating as MIO Partners in 1992, generally uses a fund-of-funds approach while also making direct investments in companies, according to a regulatory filing. It also can make long-term, illiquid investments with “higher profit potential,” the filing says.
The investment arm is overseen by a board of directors that includes current and retired senior staffers at McKinsey, and manages the company’s pension plan in addition to partner money. The arrangement, reported earlier by the Financial Times, may be seen as a conflict of interest by clients of McKinsey, a consultancy that counts some of the world’s biggest firms as customers, said Erik Gordon, a professor at the University of Michigan Ross School of Business.
“McKinsey is likely to be on firm ground, legally, but clients don’t care about legalities, they care about loyalty,” Gordon said by phone. “It can easily be seen as a conflict of interest and that’s the issue with your client. The client doesn’t have to prove that there’s a conflict of interest to walk away from you. All they have to do is to see it as a conflict of interest.”
McKinsey said in an e-mailed statement on Monday that the business is regulated by the Securities and Exchange Commission in the U.S. and the U.K.’s Financial Conduct Authority. While the MIO board is comprised of current partners of the firm, all investment decisions are delegated to MIO management, the company said.
“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,” McKinsey said today. “There is no conflict of interest.”
In the event MIO receives non-public information about an “issuer” it may be prevented from trading in that firm, according to the regulatory filing. While MIO directors can and do serve on company boards, they’re required to disclose these positions to avoid potential conflicts, it said.
MIO is led by Chief Investment Officer Todd Tibbett and president Timothy Church and its board includes 12 directors, according to the filing. In addition to managing the pension plan and former and current partner money, it oversees investments of family members of eligible employees, the filing said. MIO managed $9.5 billion in net assets as of Dec. 31, the filing said.
MIO allows clients to invest in strategies including event-driven, macroeconomic, systematic, fixed-income arbitrage, equities, and structured products. Its flagship Compass Special Situations fund has been profitable for 24 of the past 25 years with 2008’s financial crisis responsible for its only annual loss over the period, the FT reported, citing an unnamed investor in the fund.
A McKinsey spokeswoman declined to comment on the returns.
MIO employs more than 100 in its New York headquarters, according to its website. It also has offices in London, Munich, and Singapore, according to an online job posting that has since been taken down.
McKinsey isn’t the only consultancy to spawn an investment business. Partners of Bain & Co. including Mitt Romney established Bain Capital in 1984. Protections were put in place to prevent sharing of information. Unlike MIO, which is a unit of McKinsey, Bain Capital was a separate company to Bain & Co.
Bain & Co. didn’t immediately have a comment nor did Boston Consulting Group, another consultancy.
Consulting firm PwC “doesn’t have anything parallel or similar,” Lisa Macnamara, a spokeswoman, said in an e-mail. “We have detailed and comprehensive policies and processes in place to preserve our independence.”