Institutional investors, especially US endowments and foundations, should be very worried that this is just the beginning.
Today’s report that listed, $20 billion hedge fund Och-Ziff is under investigation by the SEC and the Justice Department for violation of the Foreign Corrupt Practices Act with regard to investments in Congo mining deals, is illustrative of several important trends in the institutional investment community.
One, that the enormous growth in investible institutional assets and the desire of these investors to tap into the ‘best and the brightest’ hedge funds and private investors (and the seemingly permanent low interest rate environment), has led all to the farthest corners of the earth in search of some scraps of alpha. In short, investors are desperate, and desperation is causing them to push the envelope in terms of where they invest, who they invest with, and what kinds of risks they think they can take.
Two, US and global institutional investors are under increasing pressure to sign the UN’s ESG (or SRI if you like) principles, called the Principles for Responsible Investing and to divest of many different types of investments, e.g., fossil fuel. This pressure is clearly in conflict with the former trend and the trouble that Och-Ziff finds itself in – all over a measly $250 million in loans – shows what can happen. Africa is a cesspool of corruption and the resources are the epicenter of this corruption. How many other hedge funds have also done questionable deals with sketchy partners in Africa? And how many institutional investors are, as a result, subject to significant reputational risk?
Africa has been flavor of the month for the most “forward-looking” E&Fs over the last 3-5 years. This never made the slightest sense given that the rise of the African middle class and other such lunacy was mostly if not entirely the 3rd derivative of the Great China Commodity (BUBBLE) Super-cycle. Now the tide is going out…
Och-Ziff Loans Financed Controversial Congo Deals - WSJ.com