McKinsey faces conflict of interest questions over retirement fund

22 June 2018 Consulting.us

McKinsey & Company is under scrutiny after the Wall Street Journal uncovered evidence that its retirement fund held investments that may have created a conflict of interest in six bankruptcy cases in which it played an advisory role. The revelations come just months after the founder of AlixPartners sued McKinsey under the racketeering act for allegedly misleading bankruptcy courts.

Court filings reportedly show that the retirement fund of McKinsey & Co held investments with two hedge funds – Whitebox Advisors LLC and Strategic Value Partners LLC. Through these funds McKinsey held stakes in six companies battling bankruptcy – UAL Corp; AMR Corp; Edison Mission Energy; NII Holdings; Alpha Natural Resources; and SunEdison Inc.

McKinsey was a bankruptcy advisor to each of these companies in cases which go as far back as 2002 for United Airlines parent company UAL Corp, and as recently as 2016 with SunEdison. In none of these instances did the consulting firm’s restructuring unit McKinsey RTS disclose its hedge fund investments to the relevant bankruptcy courts.

This is a chapter 11 requirement under bankruptcy regulations. All advisors are expected to be financially disinterested in the outcome for their clients. In each of the six cases, McKinsey not only did not disclose the investments in question, its officials also swore in court that the firm was a disinterested party.

The Wall Street Journal doesn’t point fingers in what is clearly a case involving complex legal questions. But the paper’s findings raise important questions for the firm, which is also embroiled in a nasty court battle with AlixPartners founder Jay Alix. If it could be proven that McKinsey knowingly withheld key information from the bankruptcy courts and provided false testimony, then the firm could face fraud charges and be convicted under the RICO act.

McKinsey faces conflict of interest questions over retirement fund

“McKinsey RTS’ bankruptcy disclosures meet all legal requirements and have been consistently approved by the courts,” a McKinsey spokesman said in response to the WSJ piece. The same spokesperson said that the firm’s retirement fund – worth some $5.6 billion – is managed by MIO Partners, a McKinsey unit which operates independently of the firm itself.

Yet the majority of the leadership team at MIO Partners are current McKinsey employees, and a substantial number are former executives – such as Jon Garcia, who only stepped down as MIO CEO last year and founded McKinsey’s RTS practice in 2010.

Garcia was himself named in a separate 2014 lawsuit by AlixPartners against McKinsey in which the firm accused two former employees of taking confidential information with them when they hightailed it to McKinsey in breach of their employment contracts. Both were recruited by Garcia and allegedly egged on by McKinsey Global Managing Partner Dominic Barton.

It should be stressed, however, that in a series of previous lawsuits involving disclosure allegations by AlixPartners against McKinsey, the courts have found no wrongdoing.

In the latest AlixPartners/McKinsey battle, the founder of the restructuring specialist Jay Alix is launching a personal suit against McKinsey, to prevent AlixPartners being bogged down by litigation. Buoyed by a sense of freedom, Alix – who sold most of his shares in 2006 – is accusing McKinsey of raking in more than $100 million in illegal fees as a bankruptcy advisor in cases it should have been barred from.

In the SunEdison Inc case Alix – whose firm suffered alongside FTI Consulting and Alvarez & Marsal when McKinsey entered the restructuring advisory game – accused McKinsey of operating a ‘pay-to-play’ scheme whereby it would hook up its consulting clients with bankruptcy lawyers in exchange for the lawyers recommending McKinsey to their own clients.

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Payments market projected to see 6.6% annual growth to 2027

17 April 2019 Consulting.us

Bank payment systems are big revenue generators for incumbent banks, and growth in the segment is projected to continue at a rapid 6.6% annual increase, from $1.3 trillion in 2018 to $2.4 trillion in 2027. Developing markets are set to see the fastest growth, increasing their total share from 52% to 61% in the same period.

The payments segment is set to see strong growth in the coming decades, particularly in developing countries. The long-time control of banking incumbents over the segment, however, faces various threats from the rise of fintechs leveraging a range of technological innovations.

To understand the changing market conditions, as well as the possible impact of new entrants, Boston Consulting Group (BCG) has released its “Global Payments 2018” report.Payments revenue is expected to grow by 1.1 trillion to 2027Payment revenue has seen a number of years of solid growth, particularly in line with developing global economies. Compound annual growth rate (CAGR) globally stood at 6.8% between 2010 and 2017, increasing from $805 billion to $1.27 trillion. Mature markets have been relatively stable, with growth of around $100 billion noted during the period, resulting in around $616 billion in revenue in 2017. Developing economies, meanwhile, saw total revenue more than double, from $268 billion to $657 billion.

While the disparity in growth between developing and mature economies is currently stark, the firm’s projections for the future will see developing markets up their growth while mature market growth slows, at 8.3% and 4.4% CAGR, respectively, between 2018 and 2027. Developing market revenue shares are overall set to continue to eat into mature market shares. The shift will see the 2027 mature market represent 39% of total revenues, compared to a 48% share 2018.Primary income set to close gap on secondary income in mature marketsThe study also examined the difference between primary and secondary revenue sources, and their respective growth rates. Primary sources represent transaction fees that come with making payments, while secondary sources represent account fee costs and related non-transaction costs. The study revealed a shift toward increased income from primary sources in mature markets, with the share between primary and secondary sources shifting from 43% and 57% in 2017, to 57% and 43% by 2027. In developing markets, however, secondary sources are and will continue to be the main source of revenue growth, at 27% (primary) and 73% (secondary) by 2027, with only a 4% increase in income from primary sources over the same period.Retail payments revenue is expected to growRetail growth is projected to represent the more lucrative growth market for payment revenues, with 7% growth between 2017 and 2027. Credit card revenue will see the strongest relative growth, up almost $462 billion, followed by account revenue and debit card revenue. The retail market, meanwhile, is set to top $1.85 trillion by 2027, with the wholesale market set to see growth of around 6%. Account revenue will see the strongest absolute growth, while credit card and debit card revenue growth is set to outpace the market as a whole, with around 7% growth during the period.

The firm notes, however, that customer sentiment is changing. Fintechs are sometimes able to provide more efficient and better tailored services – with uncertain outcomes for some incumbents. “In both the retail and wholesale payments business, customers are becoming impatient with clumsy interactions and inefficiencies,” Mohammed Badi, leader of the firm’s global payments and transaction banking segment, and the report's coauthor, said. “Consumers, treasurers, and merchants are looking for automated, integrated buying journeys and tailored service. They are being conditioned by their buying experiences in other industries. Banks, in order to stay relevant, must respond faster and more strategically to the altered payments environment by focusing on the pain points that matter most across the overall customer journey.”