The Kuwait Investment Authority (KIA), the sovereign wealth fund, has long been known both for its integrity and cautious approach to investment. But several recent initiatives point to the growing difficulty of being conservative in a world of virtually zero interest rates and modest yields — and a world in which inflation is low today but may be much higher tomorrow.
The KIA recently joined forces with real estate developer Steve Ross’s Related Companies and with Oxford Properties, to provide equity in the first stage of the $15 billion Hudson Yards project in Manhattan.
Sovereign wealth funds typically invest in buildings for their rental yield, or invest in funds such as that run by Blackstone. The KIA has always invested in prestigious projects in premier locations in cities such as London. But with rental yields hovering at about 4 per cent, that is no longer attractive. So the KIA has decided to take on development and construction risk of new buildings in the hope of earning a higher return — as much as 20 per cent — instead.
Because the KIA has had a longstanding relationship with Related, in which it is an investor, it decided to back Ross, the group’s founder, in the Hudson Yards project.
In addition, the KIA is setting aside its usual preference for investing in funds and will back infrastructure projects directly.
In some ways, that is a natural evolution. The KIA has long underwritten infrastructure projects in Kuwait following the example of trailblazers such as the Canadian Pension Plan Investment Board and the Government of Singapore Investment Corp.
“This way we can deploy big amounts in stable real assets,” says a senior fund executive. “When inflation does kick in, these assets will hold their value.”
Like the Canadian Pension Plan, though, the KIA will focus on existing infrastructure rather than investing in greenfield projects. It will also concentrate on the developed world rather than risky emerging markets. In the hope of attracting some of that money, UK government officials and the Duke of York attended the ceremony with the emir when the Kuwait Investment Office (KIO), the London arm of the KIA, celebrated its 60th anniversary in the Gulf state’s capital.
The KIO is headed by Osama Al Ayoub, one of the rising stars of the KIA. Al Ayoub was formerly at the KIA, then spent several years at Goldman Sachs before returning to the authority. Al Ayoub’s appointment to one of the most coveted positions at the KIA illustrates the authority’s tendency to appoint locals to senior roles on the basis of merit.
In common with many other sovereign funds, the KIA is subject to political masters. There was pressure, for example, put on it by a number of parliamentarians pushing the cause of relatives and others who were not necessarily qualified for the top job. Senior executives at the fund have also been summoned to parliament for questions on such matters as their buying hotels in which alcohol is served.
But these days, despite the tensions, the political masters seem happy with the organisation. Bader Al Saad, the chairman, last month had his term renewed for another four years by the board.
Al Saad has become one of the most widely admired heads of any sovereign wealth fund and has come to personify its careful investment style.
In February 2009, Temasek, the Singapore government investment arm, sold its stake in Merrill. Other investors such as the KIA discussed the matter as the shares of Merrill and other financial institutions slid, and decided not to sell.
Temasek disposed of its stake at a trough. The KIA still has its shares in what is now a unit of Bank of America, and has a big gain on its position.
It has also invested in Chinese banks. Al Saad, opened a representative office in Beijing 18 months ago, making it one of the few sovereign funds to have an office in China.
The KIA is one of the few sovereign funds in the Middle East whose money does not depend on the whims of the emir. The future generation fund that it oversees is automatically granted 10 per cent of the oil revenues of the state. Not long ago, the finance ministry approved an allocation of 25 per cent of the oil revenues - a significant sign of approval.
“We have been very fortunate to work with the KIA team over the past 10 years,” says David Bonderman, co-founder of TPG, the private equity group in which the KIA has a stake.
“They are a very thoughtful and professional team that participates across a broad spectrum of investment markets, giving them perspectives which only a handful of global institutional investors enjoy.”