A secretive global network of the rich, the powerful, and the influential, investing in each other’s companies, and trying very hard never to talk about what they’re doing. That’s the dysfunction at the heart of crony capitalism—the system whereby the rich get richer while everybody else struggles.
It’s also a pretty good description of how McKinsey & Company works.
McKinsey is perhaps the world’s best-known management consulting firm, and a high-powered farm team for America’s corporate elite. It’s also home to a $9.5 billion private hedge fund known as the McKinsey Investment Office. MIO invests in many companies linked to McKinsey, and has an enviable record: It has made money in 24 of the past 25 years, including a 14% return in 2014 alone. That’s much higher than the stock market or the average hedge fund.
McKinsey is willing to admit that MIO exists (it even has a very, very thin website), but they’re not willing to say much more than that. And beyond MIO, in the interstices of decades-old McKinsey friendships, we have no idea at all how many investments McKinsey-connected individuals make in each other’s companies.
Now, thanks to the Panama Papers, we have a tiny sliver of a window into one such scheme. It’s domiciled in a Caribbean tax haven, all but untraceable, and comes complete with a Panamanian lineage and a meaningless name: Brightao.
The Panama Papers, which were obtained by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists with Fusion and other media partners, have exposed the offshore holdings of heads of state and criminals, highlighting the potential for corruption, tax evasion, and other illicit activities within this parallel financial universe. The papers also provide a rare window into the wealth, privilege, and opportunity afforded the lucky members of the McKinsey elite, and their friends.
Brightao, founded in 2007, is a shell company in the British Virgin Islands. The founder was Peter Walker, a 43-year veteran of McKinsey and a globally recognized expert in both China and the insurance industry. The company’s founding shareholders include Sandy Weill, the financial services empire-builder who created Citigroup; legendary M&A banker Gary Parr; and various McKinsey ex-colleagues.
Brightao was created in the service of one of Walker’s protégés at McKinsey—a high-flying Chinese technocrat named Heidi Hu. It allowed big-name financiers, including current and former McKinsey employees, to invest in Hu’s nascent yet promising insurance company, even if that may have violated the spirit of McKinsey’s own rules against investing in the same companies it advises.
Hu graduated from Fudan University, one of the best in China, got her master’s degree from Chinese People’s University, and co-founded Gallup’s China branch while still teaching there. Gallup sent her to the U.S., where she got a PhD in marketing from the University of Nebraska, and joined McKinsey.
While working at McKinsey, Hu founded a Chinese insurance brokerage named Mingya. In 2007, with the support of Walker and his well-connected colleagues, she quit McKinsey to become the full-time executive chairperson of Mingya in China.
Thanks only to the Panama Papers, we know what happened next: Hu began to raise money for Mingya from deep-pocketed investors, including Walker and his friends. (McKinsey refuses to say whether MIO invested in Mingya.) When financiers like Walker and Weill wanted to invest in Chinese companies, they weren’t allowed to do so in their own name: foreign investment needed to be structured through some kind of corporate joint venture. So when Walker and his friends decided to invest in Hu’s company, they hired a Washington law firm, which decided that they needed to create a brand-new company, an investment vehicle that would be used to invest in Mingya. They called it Brightao.
There was no good reason why Brightao should be based in the U.S., with its myriad taxes and regulations—and so it wasn’t. Instead, a Panamanian law firm, Mossack Fonseca, was charged with creating a new entity in the British Virgin Islands, a jurisdiction that tries very hard to make incorporation of new companies as easy as possible.
Of course, there are other benefits to founding a company in the British Virgin Islands instead of in the U.S. For one thing, companies in the British Virgin Islands don’t pay any corporate income tax. As a result, as long as any profits remain offshore, they remain untaxed.
There are secrecy benefits, too. Were it not for the Panama Papers leak, the details of Brightao and its shareholders would have been entirely confidential. Even after the leak, Brightao’s principals would not comment on the record for Fusion. Their general rule seems to be that the less that’s said about any of this, the better. At McKinsey, the press office would not make Walker available, or talk about any possible MIO investment in Mingya; they wouldn’t even say why they’re declining to respond.
Brightao’s formal incorporation came in 2007, with a star-studded list of founders—star-studded, at least, by the standards of the American financial services industry. There was Weill, with 1,368,900 shares; Parr, with 513,350 shares; and Thomas Hardy, a former McKinsey partner turned private-equity honcho, who was in for 256,700 shares (he’d go on to buy 440,000 more in April 2008). There were smaller investors, too, including Mike Conway, Weill’s chief of staff, who bought 13,700 shares (1% of his boss’s investment) on his own behalf. Fittingly, the biggest investor of all, with 2,374,250 shares, was Walker himself. None of the investors would tell Fusion how much they paid for their shares.
Walker had delivered for Hu, not only with cash but also with connections. Hu was photographed with her boldface-name investors in the Chinese press, which was wide-eyed at her friendship with “the big crocodiles of Wall Street.” There was even a quote from AIG founder Hank Greenberg, saying that Hu was “born to be in the insurance business” and would one day be as successful as he was.
Similarly, Hu had delivered for Walker. As a high-flying international insurance expert and a Chinese national, she was perfectly placed to build an insurance empire. After all, since China lacks an effective social safety net, families are forced to rely on private insurance and will need more and more of it as the country becomes richer.
By offering to let Walker and his circle invest in her business, Hu was giving them an opportunity to invest directly in an early-stage Chinese company that had the potential to become enormous. It was essentially a “friends and family” round, where entrepreneurs raise cash from the people closest to them, both personally and professionally. Except in Hu’s case, her network comprised some of the biggest names in the global insurance industry, who could help her out with strategic advice whenever she wanted.
Just like Walker, Hu didn’t respond to multiple requests for comment. We therefore have no idea whether Walker’s investment in Hu’s company was disclosed to his consulting clients in the insurance industry and in China. Management consultancies like McKinsey have turned access to information into a veritable business model: it’s common for them to advise many competitors within an industry, giving them the ability to tell everybody else what “best practice” is.
Still, McKinsey is famously averse to taking direct equity stakes in the companies it advises: As Anita Raghavan reported in her book “The Billionaire’s Apprentice,” such arrangements were considered to “pose outright conflicts of interest in some cases and in others were totally at odds with the culture of the firm.”
In the end, even with all its advantages, Mingya didn’t quite work out as Hu had hoped. She quit the company in 2009, and while her shareholders would still love to see a healthy return on their investment, at least one of them has decided to sell. Weill ceased to be a Brightao shareholder in October 2014, when, the Panama Papers show, he sold all of his 1,368,900 shares to Conway, his own chief of staff.
The Panama Papers reveal only so much: We don’t know how much Conway paid for those shares or how he funded that investment. He wouldn’t tell Fusion when we asked. Conway, for one, has clearly learned the value of secrecy in this McKinsey-dominated world. Maybe if Mingya ever does get acquired for some huge sum, he can use the resulting windfall to kickstart his own financial services startup. He might even be able to get McKinsey to invest in it.
Additional research by Naked Truth Staff and Isabelle Niu.