The Exchanges

Q What have the results been of those investments where you have a stake and you're working on these synergies compared to the rest of your book where you're an LP?

A What we love about them is they're cash flow businesses, and you get this continuous coupon, right, which initially started in 2016 as adding only 50 basis points to one percent to my book. As of December end, they contributed five percent To return. In 2020, my, my book delivered a 12% performance. Of that 12%, five percent came from the strategic book. So now, actually, six days ago, the new strategic asset allocation plan was implemented. And with that, I'm going to be spinning over my strategic book into a newly created bucket, and it's going to be called the opportunistic book. It's a completely different business and lens because it has a different unique purpose in that we have high conviction in those managers and we want to support them in whatever way we can. If it comes to creating sidecars with them, we'll do it.

AI assessment note: “In 2020, my, my book delivered a 12% performance. Of that 12%, five percent came”

Q So what were some of those key lessons and success factors?

A The first most important thing is knowing your purpose. In Kuwait Fund, we manage the bulk of 10% and we are called hedge funds. And we were always going through this dilemma of what was our role. Is it absolute return, or is it to hedge the book? And from 2010, 2016, we had an amazing equity rally, and the IC members seriously loved equity performance and cared less about our standard deviation, and we were changing the model a lot. And that created certainly turbulence, but at the midst of it, and throughout the whole program, we had one single benchmark, and it was the HFRI Fundafund benchmark. And we beat that benchmark year and year out. Going to PEFs, the first thing that was different was the name of the department. The name of my department is Alternative Investments, which is kind of weird, because we already have a dedicated private equity, dedicated infrastructure, dedicated real estate department. So why alternatives, right? So the first thing that comes to mind there was that we fixed that allocator's dilemma and the GP dilemma of where would this investment sit? You already have those silo departments. My department was Hedge Funds Plus. This is all driven by certainly the vision of the CIO at that time, Michel Othman, and that certainly created clarity. And with that department, I managed two books. I still do. An absolute return book, which has a clear purpose, …

AI assessment note: “The first most important thing is knowing your purpose.”

Q What did that process look like over the last five, six years?

A It was a phenomenal and continues to be an amazing experience, honestly. So the first thing that happened was when I took over the book, I was given a book of 80 line items. The biggest position was a 13% position and the smallest was 50 basis points. And the operation was a back office operation. We had filing rooms with not so great details and My first day at the office was really crazy because they told me that IT was coming over and the IT guy came in with two hard drives. And I was like, what's going on? And he was like, one hard drive is for the internet and your email, and the other hard drive is for the locally saved data. So I said, great, then you have everything super secure in that file. I went there and there was nothing. All right, so I had no information about those AT-line items, and we had to act real fast. So one of the great things was that I carried over a lot of the stuff that we developed and built at Kuwait Fund. And one of those was the DDQ, the diligence questionnaire. So we reviewed that diligence questionnaire, built in the missing links around how was the introduction made? Is there any third-party or placement agents? Any dependency issues? What are your employer retention plans, et cetera? And we created this deck of 25 pages. Went across the list and said, Okay, there's information, but it's certainly missing and non-indicative. Let's rebuild tha…

AI assessment note: “So the first thing that happened was when I took over the book”

Q So you were going from ten billion to a hundred billion. 40% cash. How did you and Michelle, the team that came in, think about how you wanted to restructure and put all that money to work?

A The first thing was we had to build a team. We had to create a story. And Michelle is an amazing visionary guy. He came in and he said, we're going to focus on three things. And it's the three Ps, the people, process, and the portfolio. The first thing to make this survive and thrive was that we had one vision. And this vision has to be clear to everyone, and that we want to be the best institutional investor in the region in the next five years. Let's bring in the best talents. And when we try to attract the best talents, we're looking for one single thing, and it's passion. Because everything can be managed and created with the tools that we have here. But passion is something that can't be replicated or created. Michelle joined in, in, in February of 2017. And that was the official starting point of the new organization structure of PIFs, specifically for the investment sector. And that came the creation of a CIO role, which Michelle was at the helm of, and then came the breaking up of departments and the creation of new departments. So we went from the three investment departments to six front office departments with two support departments.

AI assessment note: “we're going to focus on three things. And it's the three Ps”

Q So now within your book, you've redeemed 60% of the managers. So it was whatever, 10, 12% of a hundred billion. You have billions of dollars to put to work. How did you do that over the last couple of years? How did you think about it, and what'd you do?

A In the bull market, right? In the bull market, no one wants your money. But at the end of the day, it's a network effect, and the people that we knew, and the amazing job that different heads of departments did, led by Michel Othman, in terms of reintroducing PIFs to the world. And we did major global trips. We were present in every Investment conference there is. We reestablished relationships with prime brokers and capital introduction firms, and that was the site of it. One message we wanted to send clearly was that we are not looking for returns. We're looking for people and process. We are a long-term investor. We'll show it over time, and we're patient capital. We're going to persevere. So if we don't get the allocation today, it's fine. We won't go to a second-tier manager because we didn't get the top-tier.

AI assessment note: “We reestablished relationships with prime brokers and capital introduction firms, and that was the site”

Q So as you develop that transparency, what have you found that you apply to your own investing or some of the best ways that you've seen, say, fund to fund allocators investing in hedge funds?

A Back in the day, and starting off at Kuwait Fund, I used to be excited when I saw a fund of fund have an allocation to Millennium, or Paulson, or Ken Griffin, right? But then we realized that Wait a second. There's something wrong. We have indirect exposures to Paulson and Revan and Ken Griffin and all of those guys as if it's a direct allocation, and we're paying a lot of money for that. Then that's when a change in mentality happened in that there has to be a reason for anything that comes in. While we trust the manager's construction, there has to be a purpose in bringing that manager to our book. There has to be a marginal benefit. And that's when our philosophy and construction at that time in Kuwait Fund really changed.

AI assessment note: “Then that's when a change in mentality happened in that there has to be”

Q So how many of these 20 or 30 relationships are from Constellation, and then how many have you done on your own?

A On our own, directly, we haven't done anything. It's almost entirely through WAFRA. If we take a step back, PIFS has three investment arms, and it's WAFRA New York, WAFRA Real Estate in Kuwait, which is involved in MENA and GCC real estate, and WAFRA International, which is focused on local and MENA equities. So with regards to the strategic relationships that we have, we have 14 GPs, Where we own five to 30% of that specific business, and we have six businesses where we have revenue share out of that, and what's most interesting in that, in addition to trying to create synergy, was trying to create business and reintroducing those firms and their products initially to different departments at PIFS, and then externally to whatever relationships we have. So out of those 21 relationships that we have. PIFS currently has LP money with 10 of them, and one thing that we're currently working on is that we're creating this feedback form where it's kind of a survey that is going to go out internally at PIFS initially every six months. So each head of department and this team will get a template where they mark or take across Which of those relationships they have relationships with, and they evaluate their experience, not only evaluate their experience as an investor, but as an outsider. And what value add can we create? What guidance can we give? What interest do we have in whatever s…

AI assessment note: “On our own, directly, we haven't done anything. It's almost entirely through WAFRA.”

Q How have you thought about tilting your investments from just being an LP, or you call it a passive LP, to being effectively part of the GP?

A When it sat in the private equity book, it was an investment that was labeled by an IRR and MOIC. When it came to us, it was way much more than that. And that's where the strategic and asset owner mentality kicked in. So some of the stuff we're doing there is that today we sit at two-on-one strategic relationships and a huge Focus for the institution is synergy. How can we synergize those relationships? And we're currently working, for instance, with the strategy department here at FIFS and introducing those strategic relationships to the strategy department and trying to create some type of strategic relationship and cooperation between the state of Kuwait and those strategic relationships. Initially, that strategy was on a deal-by-deal basis. And then we decided that we have to open up the strategy to the outside world. So through Constellation, we did it through a JV, initially with Alaska and RELPEN, and with other mature stakes, we invited our friends over at the KIA Kuwait Fund, and now working with other institutional international investors.

AI assessment note: “that's where the strategic and asset owner mentality kicked in.”

Q What do you think your evolution will be with these investments over the next five or 10 years?

A It's twofold. So we have the growth and mature strategies, and we have the co-investment effort that we only started in May of last year. It's been a rewarding experience ever since. What we want to do is, similar to what we did in Constellation, we want to bring other like-minded institutional investors in. Only when the time is right, because we're willing to take that unfunded pulled risk, because we're doing it with Wafra. And when we have the right constructs, we want to be able to attract other institutional, international firms to the table and probably dilute ourselves out and diversify that and expand the opportunity set for that program. Back to the innovation point you raised earlier. So the last three years for us were about taking risk, and the next three years for us are about being honest with ourselves and Taking smart risk. So for instance, we did good in COVID, but we could have done better. And what hurt us the most in COVID was the social credit exposure. And one of the lessons and takeaways there was that we still are going to do social credit, but we're going to do it in a different route. All esoteric social credit is going to strictly be done through close ended fund formats. And that is because While we're long-term investors, we don't want the market to take advantage of us or other investors. We're only going to do investment-grade social credits in o…

AI assessment note: “It's twofold. So we have the growth and mature strategies, and we have the co-investment”

Q So in those initial forays in Wafra and the Kuwait Fund, what did you learn about investing that sort of created what you're trying to do at PIFS?

A I think it all started back in Wafra. My training program there started in January of, coming out of school with all of those economic learnings that we've got, and then throwing everything out the door with quantitative easing and what's happening there. What Wafra gave me at that time was I got to rotate across different departments and different asset classes, and I fell in love with hedge funds. From that moment in time, I knew that I wanted to be An allocator, and specifically in hedge funds. That multidisciplinary nature of hedge funds, this pursuit of excellence, of persistent alpha, always got me engaged. That drive for curiosity or intellectual curiosity really triggered me. Straight out of Wafra, I knew that I wanted to be an allocator, and I wanted to be specifically in hedge funds, and that's why I joined Kuwait Fund. In Kuwait, there are basically three institutional investors of scale, Kuwait fund had the smallest ticket. For me, it was an obvious choice because we had an open door policy. And if anyone was going to visit Kuwait, they might as well spend time with us if we had that open door rolling.

AI assessment note: “From that moment in time, I knew that I wanted to be An allocator”

Q And how did you get the conviction to invest in the fundamental managers in Europe, but market neutral in Asia? Where did those insights come from?

A It comes from experiences, specifically the book. So we had probably at that time, 20% of our book in Asia, and we deemed almost all of it. To me, Asia was something that was fascinating, but I've never visited. And we said, we won't do any single investment unless we get really comfortable with Asia. And then only when we visited Asia, and every single country, be it Singapore, Tokyo, China, and Hong Kong, realized that All right, we can't label it as Asia because every country has its different culture and way of doing things, so we have to change our approach and realize that there it's, it's a beta market, it's a volatile market, and it would only make sense on a net basis to do it through a market-neutral approach. That's my change in the future, right? Because one of the important lessons here is that you have to be flexible. This is one of the most important teachings for me growing up in that I used to think that when I decide I can't go back, what I realized at PIFS is that it's okay to change your opinion, and it's okay if even if you have conviction to shelf an idea for it and go revisit it, that really worked for us.

AI assessment note: “realize that there it's, it's a beta market, it's a volatile market”

Q So when you put this all together now, a couple of years later, you had these fund to funds for information sharing and network, you're meeting with lots of managers. What does that book look like today in terms of the mix of types of strategies and implementation vehicles that you have in it?

A I'll take you through the return, right? And then that would certainly translate into the construction itself. When we took over the book in October, the annualized return for the AID was a one percent over three percent volatility. It was bad. The Sharpe was -.2. We had the beta of seven, seven basis points to the HFI fund-weighted composite. We had a negative 1.3% alpha. We had the beta to the MSCI of 24 basis points and a negative alpha. So there was something wrong. And as bad as it is, we are still underperforming the benchmark. Almost four years later, so by the end of December, the book collectively had a seven percent return on a six percent volatility. So that's a sharp of one. And the beta to the HFI Fund weighted composite came down from 77 basis points to 63. What was amazing was that the alpha turned around from a -1.3% to a positive three percent. And looking at MSCI specifically, you can easily say that it could easily been done because we had a bull market. We maintain the same beta to the MSCI. So it's still the .24, but with a positive three percent alpha.

AI assessment note: “I'll take you through the return, right? And then that would certainly translate”