Risk measures from a General Partner (GP) point of view
As equity investors operating in an environment surrounded by uncertainties, GPs are faced with a set of risks that may hinder the completion of their objectives. At each key phase of the investment, GPs are responsible for implementing processes designed to identify and assess the primary risks. In assessing the return potential of an investment, consideration should be given to the associated risks. To achieve an attractive risk-return ratio, three essential features should be considered:
- assessment of business risks during Due Diligence phases by including in the scope of investigation country risk, financial risk, management organisation, business ethics, interest rate risk, ESG risk factors, monitor with appropriate KPIs those identified risks and put an appropriate action plan with the portfolio company management to manage those identified risks;
- assessment of financial risks stemming from debt leverage at acquisition and during the life of the investment vs cash-flow generation by the portfolio company;
- involvement of the executive officers and employees, at their respective levels of responsibility and authority to establish a strong risk management culture.
GPs are expected to prevent and mitigate significant risks through organizational and operational measures, within their own organization and facilitate this for their portfolio companies. These may include: improvement objectives, training, awareness raising, risk mapping, action plans, questionnaires, supply chain audits, whistleblowing mechanisms, operational procedures, development and integration of ESG policy and internal audit.
Management should make sure appropriate risk measurements and procedures are in place to assess the key risks that could evolve during the lifetime of each investment. Once risks have been identified management should make sure executive officers and employees are appropriately involved.
In addition, applicable laws (including the AIFMD) make specific provisions concerning GP and portfolio risk management.