“The Kuwait Investment Authority [KIA] has always been a black box. No one knows what goes in, what comes out, and what is going on inside. But it was here before everyone else; it is still here—and it is growing.”

I am on the 30th floor of one of the skyscrapers in Kuwait’s capital city which was constructed—painstakingly slowly—during the financial crisis. I am talking to a senior financier who deals with the small state’s largest national wealth fund. We are drinking sweet tea and overlooking the Arabian Gulf. He, like the others I have arranged to meet, has agreed to tell me what he knows about the KIA’s activity on the strict understanding that his identity will not be revealed.

“Many people work with the KIA: It is a huge investor in a very small country. But it is also a government agency and thus avoids any kind of publicity,” he says. “In Kuwait it takes years to build up a relationship, but it can be ruined in an instant—and no one wants that.”

This is how the fund has managed to stay under the radar since its inception more than 60 years ago, despite being one of the largest asset pools on the planet and making multimillion-dollar international investments. And this is why I have come to Kuwait: to find out how it allocates capital, deals with partners—and what it is planning for the future.

It all began in London in 1953. An account at the Bank of England, created by Kuwait’s emir to collect oil revenues, was transformed into a standalone agency: the Kuwait Investment Board. Four trustees were appointed—including two Bank of England directors—to ensure the prudent investment of these reserves. That such high-ranking officers were responsible is indicative of the size it had already achieved. Back in 1946, Kuwait made its first exports of crude oil, and for several decades it was the largest producer of black gold in the Gulf region.

Today, there are very few people who know the exact value of assets managed by the KIA. Estimates in the press put it around $350 billion, but those closer to the inner workings put it much higher.

“I would say it is closer to $425 billion,” says one Gulf-based financier. “It’s a lot bigger than most people think, and the KIA is not about to start correcting people. Why would they?”

After the state gained independence from the UK in 1961, the London-based investment board was renamed the Kuwait Investment Office (KIO) and given specific responsibility to manage what became known as the Future Generation Fund. Since 1976, 10% of the country’s annual income has been allocated to the fund, which came into its own after Saddam Hussein’s invasion, and subsequent liberation, in 1990. Rebuilding the country cost more than $85 billion, according to official figures. The Future Generation Fund paid the bill.

But there is more to the KIA than one account. The General Reserve Fund is also a sizeable pot of capital, but put to work in a different manner, its partners say. It serves as a slush fund in case the government goes over budget in any given year—but has not been touched for decades. Indeed, such is Kuwait’s overwhelming oil revenue that as part of the 60-year celebration of the KIA, the country invested 25% of its entire annual income into the Future Generation Fund.

“It’s our rainy day fund,” says one Kuwaiti financier. “We don’t need it yet, but we have needed it in the past and it is likely we will need it again.”

They will need it when oil and other fossil fuels finally run out. So the KIA investment team are making hay while the immensely hot sun shines. “As an investor, it looks and feels like an endowment,” says one KIA partner. “It has liabilities to meet, but there is still plenty of cash flow and the liabilities are decades away.” 

As for its portfolio makeup, questions abound. “The asset allocation model, if anyone outside the building knew what it was, would probably involve looking for unique opportunities that would fit within its structure,” says one partner. “Additionally, I would say they work with at least 100 fund managers and have a list of other service providers around the globe. They drive a hard bargain on fees and not just because of their size; don’t forget their ancestors were traders on the ancient silk routes.”

The KIA was one of several clients stung in an overcharging scandal by State Street’s transition management team, which came to light starting in 2010. Edward Pennings, a former member of the State Street team, said in an employment tribunal following his dismissal that the KIA was one of the first clients targeted. Documents also showed emails between him and his boss saying that they should “back up the truck” to collect the extra fees they would earn on the contract. Although neither the bank nor the fund has commented publically on the issue, more than one source has said the KIA demanded every transition cent it paid to State Street—even outside this overcharging—be refunded.

This haggling nature has come increasingly to the fore in recent months.

“They are having a bit of a cull at the moment,” says one London-based financier. “I have heard from several active managers that the Kuwaitis are demanding lower fees, and if they don’t get them they drop the mandate. These are sizeable mandates, too—but there is always another investor willing to sign up to take their place, at least at the moment.” 

“It’s a lot bigger than most people think, and the KIA is not about to start correcting people.”

It is not that the KIA is allocating to cut-price fund houses. Instead, they are doing more of their investing in-house, those who work with them say.

“What is the point of running $200 billion on an active ticket? You’re not going to get alpha on all of it—and you’ll pay a hefty whack in fees,” the London-based financier continued. “I suspect the KIA is moving the same way as some of their more innovative neighbours and passively running many of the assets in-house.”

And they have quite a team to do it. Although the KIA staff directory is a closely guarded secret, those who represent the investor at international events and conferences are some of the smartest people in the business. In May, Bader Mohammad Al-Sa’ad, the sovereign fund’s managing director, sat on a panel alongside Ding Xuedong, chairman of the China Investment Corporation, Heung-Sik Choo, CIO of the Korea Investment Corporation, and Kirill Dmitriev, CEO of the Russian Direct Investment Fund (RDIF).

The topic? Investing in Russia—and yes, they do, in case you were wondering.

“They are very outward-thinking,” says a Gulf-based financier. “Most of the KIA’s capital is deployed outside of Kuwait. In the beginning it would support small businesses inside the country, and to some extent it still helps liquidity in the stock exchange, but the majority of its assets are outside. For such a large investor, the opportunities in the local market are scarce.”

And as the fund gets bigger, these smaller, rare opportunities are becoming less attractive.

“The KIA has begun selling more domestic assets,” says another financier. “It has had discussions with bankers about how to move the holdings into the market, and presented to parliament—in a closed session, of course—about moving more of its investments overseas.”

The KIA already has a sizeable overseas presence. Befitting its roots, the fund is one of London’s largest property owners through its offshoot company St Martins. It is landlord to the city’s mayor through the More London complex; it also owns several high-rise buildings in the Square Mile and Canary Wharf, the tenants of which include international asset managers and banks who would love the fund as a client.

“The minimum ticket for KIA deals is $500 million,” says one person with knowledge of the fund’s activity, “and they like to partner with someone else.”

That someone else can be an asset manager (with a highly efficient due diligence team that can process deals on behalf of all partners) or other institutional investors with similar appetites.

Its aforementioned foray into Russia saw the KIA buy into the country’s financial sector. It had made an attempt a few years earlier, but preferred to team up with the RDIF, Al-Sa’ad said during the panel session, due to the fund’s local knowledge and ability to carry out on-the-ground due diligence.

A year ago, the KIO teamed up with Canada’s Borealis—backed by the Ontario Municipal Employees Retirement System—and the Universities Superannuation Scheme to buy the UK’s Severn Trent utilities company. The bid was unsuccessful, but it showed the range of players Kuwait’s investors are happy to partner with.

Who they are less happy to associate with may be more of a surprise.

“It is unlikely that you will see the KIA partner with another large investor from the Gulf Cooperation Council,” says one local financier. The feeling appears to be mutual. Abu Dhabi, Bahrain, Qatar, and Saudi Arabia have asset piles dwarfing those found in other areas of the world, but they rarely work together unless the deal has a coordinating partner, such as an investment bank.

“The ‘cooperation’ part stretches maybe as far as political cooperation, but that is it,” says a local banker. “In fact, large funds in the region see each other as competitors for deals. They won’t even use neighbouring investors as sounding boards. They need to keep the competitive edge.”

The KIA is willing to interact on some level with others in the Arab world, however.

“When it was created, it was enshrined into law that the General Reserve Fund was to focus on the Middle East and North Africa, to help the region’s development; a kind of strategic initiative for its Arab brothers,” says one financier.

In May, KIA Executive Director Bader Al-Ajeel met the Tunisian prime minister to explore ways to promote joint investment. “We have assessed the progress of the investments and projects being funded by KIA’s financial arm in Tunisia, the Kuwaiti-Tunisian Development Group,” Al-Ajeel said, adding there would likely be more investment in the future across tourism, industry, infrastructure, and communications.

“Although the KIA is now looking towards Europe and other opportunities in Asia, it keeps offices in Tunisia, Algeria, Morocco—where it has been doing good, long-term work for those communities and giving its staff working experience,” says one local financier. “Obviously, these offices are not kept under its own name.”

But even if they were, it is unlikely that they would be spotted. 

For those who have visited the world’s largest banks and asset management firms—or even the small ones—cast the highly polished offices with banks of well-groomed reception staff from your mind. The main KIA HQ is unremarkable, and it is almost by mistake that I walk into it.

As one of several government agencies, the KIA is based in the main ministries complex in Kuwait City. This four-storey, white-washed building is of typical 1960s design—squat, rectangular—with no signage on the outside save numbers of sections to help guide in its (presumably already informed) visitors. It is raised around 10 foot on a mound and encircled by a wall of the same height. The white walls are dazzling and make quite a statement against the various high-rise, shiny, 50-storey buildings that surround it.

A single, somewhat random three-man TV camera crew stands outside the perimeter wall under an awning to protect them from the burning sun. Solitary water and ice cream vendors are making paltry sales outside the main gates as men in bright white dishdashas and women in black abayas float in and out.

“Handbag, madam,” says the khaki-clad security guard.

“Thank you.”

I pass through the metal detector, pick up my belongings and join the throng of office workers, government officials, and maintenance crews who are milling around the complex.

If there is air-conditioning, it is being thwarted by the open doors to the main courtyard, which houses a large, sky-blue tiled waterless fountain in the centre of a grey marble terrace. It is enclosed by different cogs in the Kuwaiti government machine, accessed through a series of similar, but smaller, courtyards.

Raised flower beds, planted with tiger palms, offer benches upon which business is being conducted by mobile phone—through omnipresent cigarette smoke—as immigrant workers keep the floors clear of the dust that coats everything in the city.

A trio of small kiosks flank two sides of this main courtyard. They are independent companies offering typing, photocopying, and other secretarial services. They seem to be doing good business.

“I’ll be able to tell you about it… but not until next week,” laughs a western man in shirtsleeves, clutching a Starbucks coffee cup, to another in similar attire holding a bag of muffins.

I follow them as far as the Ministry of Finance quadrant, outside which another group of western men are standing, looking uncomfortably hot in jackets, holding briefcases, and waiting. It is approaching midday, and even under the awnings shading the courtyards, 41 degrees is hot for anyone, especially those in pure wool suits.

The Ministry of Finance has the best air-conditioning of the complex, and so, it turns out, does the KIA, which is housed in the office directly across the courtyard. I notice the KIA sign above the door as I am wandering towards a map of the complex to find out where I am.

The KIA’s glass double doors are open, and outside three men chat, smoke, and somehow continue individual conversations on their mobile phones. The reception desk—a plain table covered with papers—is manned by a lone security guard, and by the far wall of the lobby sits a single, brown, leather sofa.

At this juncture, I will mention that I asked the KIA for an interview, and despite sending the journalist’s equivalent of letters of reference through various sources, my offer was very politely declined. Therefore, I don’t barge in and introduce myself. I have learned enough about the Middle East to know that no means no.

To the left of this main entrance is a pair of lifts that serve all four floors dedicated to the KIA. American, Asian, European, and local investments all have their own department, as does training and other strategic functions. Even the loans department has its own separate entry on the list. For reference, accounting and auditing sit together on the fourth floor.

If any KIA staff member has delusions of grandeur after a day handling enormous sums of money, exiting their office to join the packs from the Department for Guidance and Systems or Project Construction and Management should dispel them fairly rapidly.

Despite these rather lowly surroundings, everyone wants to work here.

“The training is excellent,” says a financier. “They are sent all over the world to learn about financial markets. It is very competitive as the staff is not that big, relatively speaking.”

The KIA offers scholarships to Kuwaiti citizens who have secured a placement on an MBA course at one of 10 approved international universities. The grants are generous, but the conditions are strict. However, once back at base, the real hard work begins, and many are unprepared for the rigours of working for one of the world’s largest asset owners.

“A lot of government workers have an easy life,” says a foreigner working in the Kuwaiti financial sector. “They start work at 8am and leave at 2pm. They get a really good salary, and there are far too many of them to do the work. That’s not the case at the KIA, and it is a rude awakening for some.”

However, there is relatively little staff turnover—at least at the KIA HQ, I am told—and the workload seems only set to increase.

“It is a challenge to invest this level of assets—especially when they continue to rise,” says one financier. “Investors reap economies of scale up to about $100 billion, after that, size just gets in the way. Accessing new ideas, niche ideas, is very tricky—and very expensive. Also, there are parts of the market, such as energy, that may be excluded from their portfolio due to the ‘doubling down’ effect.”

There is one area of investment to which some think the KIA should be paying more attention—and which is causing significant consternation at home.

“We are about to celebrate the opening of the first new hospital in nearly 30 years,” moans one resident, “the first new electric plant in 25 years. Look at all the empty lots around the city and the buildings that need either repairing or tearing down.”

However, this is not the job of the KIA, Kuwaitis argue. “The two matters are completely separate,” says one. “The KIA has the fiduciary responsibility to look after the wealth of the country that has been entrusted upon it for future generations. It is not a social development programme. If the fund’s money was spent building bridges and hospitals here, it would be criticised by policymakers for investing against its mandate. ”

These policymakers are the only ones to whom the KIA is completely answerable. As much as it shies away from publicity, every single dinar must be accounted for to parliament, the representative of the general Kuwaiti public whose money this is at the end of the day.

“If a fund blows up and the KIA loses money, only the parliament will know,” says one local financier. “So it uses funds-of-funds rather than single investment vehicles to try and minimise these losses. They have been doing this a long time. They know what works.” 

“If a fund blows up and the KIA loses money, only the parliament will know.”

But this long pedigree is considered a hindrance to some.

“Kuwait was the first for many things: We had the first stock exchange in the Middle East; the first national airline; the first sovereign wealth fund,” another finance professional says. “Now, it seems we have fallen back from our leading, pioneering position. Other funds have taken over in size, have helped bring investors to their countries—Kuwait seems to have lost its edge.”

However, a small building site close to Arabian Gulf Street, the main road around the city’s headland, may be about to propel the KIA from the 1960s towards the high-tech future.

“Kuwait Investment Authority Headquarters Building Project” a large panel announces in Arabic and English. It shows a broad, 50-storey skyscraper with regular cutouts all the way up its height. In addition, a long, squat building backs into its base and runs out to a slanted, pointed end. Each section is illustrated in silver with criss-cross patterns across the whole thing.

It is next door to the new central bank building, which is further along in its construction, but not by much.

The architects, KEO Consulting, say on their website that the KIA’s building is based on “traditional Islamic architectural principles and ideas”.

“While the recent years have seen an abundance of Western-styled buildings spread throughout the region, these buildings are beginning to demonstrate that they clearly belong to a culture and environment other than that which we find in the Middle East. Their unsympathetic architectural forms and clear disruption of celebrating the social need to interact within office spaces reveals a Western notion of planning that will not produce a timeless and functional building in the long term.”

Is this an oblique insight into what its client, the KIA, thinks and feels about its own sector? Maybe. But at least there is no mistaking its announcement to and arrival in the 21st century.

And it will, at the very least, be much easier to find on my next visit.

—Elizabeth Pfeuti