Heitor Moura 2007 Risk Management For Private Equity Investments
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Heitor Moura
A RISK MANAGEMENT PLAN for an investment and trading project
January 2007
UNICONSULT SERVIÇOS TÉCNICOS LTDA. – RIO DE JANEIRO
Risk and its management • Risk is the possibility that an event will occur, which adversely affects the achievement of objectives. • Risk management is: • • • • • •
PROJECT
an on-going process, a means to an end; carried out through plans, policies, surveys, controls, information and fundamentally by people; applied in a strategic setting, that is, directed towards objectives; applied throughout the organization, at all hierarchical levels and regional units; aimed at identifying and managing potential adverse events and situations; designed to offer reasonable assurance to its management and board of the organization's understanding of risks and of its capability of minimizing their effect.
jANUARY 2007
2
Risk Management Process
RISK MANAGEMENT PLANNING
RISK MANAGEMENT MONITORING
RISK OCCURRENCE RESPONSE
PROJECT
jANUARY 2007
3
Risk Management Process - Planning RISK MANAGEMENT PLANNING
RISK IDENTIFICATION
RISK MANAGEMENT MONITORING
RISK OCCURRENCE RESPONSE
RISK OF DELAY IN INVESTMENT DECISION
RISK ASSESSMENT
LIKELIHOOD: IMPROBABLE IMPACT: SMALL TIME-FRAME: SHORT-TERM
MITIGATION OF LIKELIHOOD
MITIGATION OF EVENTUAL IMPACT
PROJECT SCHEDULE
SIMULTANEOUS PROJECTS PARTIAL-DECISION PROCESS
PROJECT
jANUARY 2007
RISK-RESPONSE PLAN
4
Risk Management Process - Monitoring RISK MANAGEMENT PLANNING
MONITORING
RISK MANAGEMENT MONITORING
RISK OCCURRENCE RESPONSE
FOLLOW-UP OF NEGOTIATION PROCESS
CONTINUED RISK ASSESSMENT
CHANGE TO LIKELIHOOD? CHANGE TO IMPACT? CANGE TO TIME-FRAME?
REVIEW MITIGATION OF LIKELIHOOD
REVISION OF SCHEDULE
ACCELERATE NEGOTIATIONS OPEN NEW NEGOTIATIONS ETC.
PROJECT
jANUARY 2007
REVIEW MITIGATION OF EVENTUAL IMPACT
REVIEW RISK-RESPONSE PLAN
5
Risk Management Process - Response RISK MANAGEMENT PLANNING
RISK MANAGEMENT MONITORING
OCCURRENCE OF RISK EVENT
RISK OCCURRENCE RESPONSE
DECISION IS DELAYED
RESPONSE TO SITUATION
ACTION TO SPEEDEN DECISION ACTION TO SUBSTITUTE PROJECT
CONTROL OF RESPONSE
FOLLOW-UP ON ACTIONS
ASSESSMENT OF SITUATION POST-EVENT
REVIEW OF PLAN REVIEW OF RESPONSE
PROJECT
jANUARY 2007
6
Risk components
TIME-FRAME
EXPECTED IMPACT OF OCCURRENCE
LIKELIHOOD OF OCCURRENCE
POSSIBILITY OF REDUCING LIKELIHOOD
DECISION TO TAKE ON RISK
EFFECT OF RISK
POSSIBILITY OF COVERAGE
PLANNED RESPONSE TO EVENTUAL OCCURRENCE
INTENSITY OF EFFECT
EXPECTED RESIDUAL RISK
PROJECT
jANUARY 2007
7
Risk components 2 • Likelihood of occurence Probability • • • • •
0% to 1% : over 1% to 5%: over 5% to 20%: over 20% to 50%: over 50% to 100%:
Likelihood highly improbable improbable eventual probable highly probable
• Time-frame for this occurence • •
PROJECT
within 2 years after investment: short-term, i.e. there is little time to change risk conditions until 8 years after investment: medium term. i.e. there is some time to change risk conditions
jANUARY 2007
8
Risk components 3 • Effect of risk • • • • •
Delay in operations Increase in cost Loss of revenue Loss of assets Increase in liabilities
• Intensity of effect • • •
low medium high
• Result of occurence • • • • PROJECT
small: medium: great: drastic:
affects standard IRR by less than 1% p.a. affects standard IRR by over 1% up to 3% p.a. affects standard IRR by over 3% up to 5% p.a. affects standard IRR by over 5% p.a. jANUARY 2007
9
Risk coverage
INSURANCE
HEDGE MITIGATION OF EVENTUAL IMPACT GUARANTEE
OTHER CONTRACTUAL TRANSFER ABSORTION OF RESIDUAL RISK
PROJECT
jANUARY 2007
10
Risk categories combined with results 100
200
400
800
3200
100
200
400
1600
50
100
200
400
1600
50
100
200
800
20
40
80
160
640
20
40
80
320
10
20
40
80
320
10
20
40
160
5
10
20
40
160
5
10
20
80
2
4
8
16
64
2
4
8
32
1
2
4
8
32
1
2
4
16
2
4
8
32
1
2
4
16
Small
Medium
Great
Drastic
Small
Medium
Great
Drastic
SHORT TERM
MEDIUM TERM
RISK CLASSIFICATION From 1 to 7
Acceptable
From 8 to 19
Acceptable
From 20 to 31
Acceptable
From 21 to 63
Acceptable
From 64 to 99
Only acceptable if covered
From 100 to 299
Only acceptable if covered
From 300 to 499
Only acceptable if covered
500 or over PROJECT
jANUARY 2007
Not acceptable 11
Decision parameters • Acceptable risks • • •
Define risks Analyse possible reduction of likelihood and mitigation of impact Include cost of these counter-measures in investment analysis
• Risks acceptable only if covered • • • •
Define risks Analyse possible reduction of likelihood and mitigation of impact Establish coverage (insurance, hedge, security) Include cost of these counter-measures and coverage in investment analysis
• Non-acceptable risks • • • •
PROJECT
Define risks Analyse if possible counter-measures or coverage can change their classification Reject investment if this is not feasible and efficient (investment phase) or Take drastic counter-measures or divest operation (after investment phase)
jANUARY 2007
12
Main risks in each phase of Project •
Investment decisions • • •
•
Entry into each local business • •
•
Market fluctuations Lack of or reduced synergy among operations
Divestment of each business • • •
•
Technical risks Regulatory and tax context Management efficiency
Joint operation of all businesses • •
•
Resistance from local groups Delay in establishing management procedures and controls
Operation of each local business • • •
•
Delayed decision Competition for each investment Unprofitable choice
Market Protracted negotiations Competition for new investors
Post-divestment •
PROJECT
Outstanding liabilities
jANUARY 2007
13
Risks in the investment phase An example • Risk identification • Type • Level • Likelihood • Impact • Time-frame
PROJECT
jANUARY 2007
14
RISK
TYPE
LEVEL
LIKELIHOOD
IMPACT
TIME-FRAME
Organization Human factor
1-Project
2-improbable
1-small
3-short-term
Human factor
1-Project
3-eventual
1-small
3-short-term
3 Delay in making decision
Organization Human factor
1-Project
2-improbable
1-small
3-short-term
4 Delay in concluding negotiations
Economic Human factor
1-Project
3-eventual
2-medium
3-short-term
5 Back-trading by sellers
Economic Human factor
1-Project
4-probable
2-medium
3-short-term
6 Change in country market context
Economic
2-Country
5-highly probable
3-great
2-medium-term
7 Change in world market context
Economic
3-Organization
5-highly probable
3-great
3-short-term
8 Change in country business context
Economic
2-Country
3-eventual
3-great
2-medium-term
9 Change in world business context
Economic
3-Organization
3-eventual
3-great
3-short-term
Delay in establishing and executing documents
Organization Human factor
1-Project
2-improbable
1-small
3-short-term
11 Inclusion of undesirable/incorrect clause
Organization Human factor
1-Project
1-highly improbable
2-medium
3-short-term
12 Non delivery of mandatory licenses
Regulatory Human factor
1-Project
2-improbable
2-medium
3-short-term
13 Delay in delivery of mandatory licenses
Regulatory Human factor
1-Project
3-eventual
1-small
3-short-term
Non discovery of unacceptable risks or liabilities
Organization Human factor
1-Project
2-improbable
4-critical
2-medium-term
Criminal
1-Project
2-improbable
4-critical
2-medium-term
Cultural Human factor
1-Project
4-probable
1-small
3-short-term
1 Delay in identifying prospects 2
10
14
Delay and/or non supply of information by sellers
15 Fraud in delivered information 16
Resistance from local management / labour PROJECT
jANUARY 2007
15
RISK
GUARANTEE INSURANCE HEDGE POSSIBILITIE POSSIBILITIES POSSIBILITIES S
RESIDUAL RISK
REDUCING LIKELIHOOD
MITIGATION OF IMPACT
Pro-active search
Simultaneous projects
None
None
None
Low
Documentation list Local follow-up Expliciting the requirement Expliciting consequences
Partial-decision process
None
None
None
Medium
3 Delay in making decision
Project schedule
Simultaneous projects Partial-decision process
None
None
None
Low
4 Delay in concluding negotiations
Project schedule
Simultaneous projects
None
None
None
Medium
Clear negotiation Reputable partners
Simultaneous projects Competitive negotiation Analysis parameters with expected time-frame average Analysis parameters within expected time-frame average Sensibility analysis within expected parameter range Sensibility analysis within expected parameter range
None
None
None
Medium
Country risk
Price hedge
None
Medium
None
Price hedge
None
Low
Country risk
Price hedge
None
Medium
None
Price hedge
None
High
Simultaneous projects
None
None
None
Medium
None
None
None
None
Low
None
None
None
None
1 Delay in identifying prospects Delay and/or non supply of information 2 by sellers
5 Back-trading by sellers 6 Change in country market context
None
7 Change in world market context
None
8 Change in country business context
None
9 Change in world business context
None
10
Delay in establishing and executing documents
11 Inclusion of undesirable/incorrect clause 12 Non delivery of mandatory licenses 13 Delay in delivery of mandatory licenses 14
Non discovery of unacceptable risks or liabilities
15 Fraud in delivered information 16
Resistance from local management / labour
PROJECT
Competent legal advisors Internal review Competent legal advisors Internal review Competent legal advisors Local representatives Competent legal advisors Local representatives
Contractual obligation to deliver correct information Contractual obligation to deliver correct information
Comprehensive due dilligence
Contractual generic guarantees
None
None
Contractual obligation
Low
Contractual obligation to deliver correct information
None
None
Contractual obligation
Low
Contractual generic guarantees
None
None
None
High
Comprehensive due dilligence Adequate confidentiality procedures Winning local management Communication program with local stakeholders
jANUARY 2007
Contractual obligation Contractual obligation
Low Medium
16
List of potential risks 1 •
Commercial - Sourcing • • • •
•
Performance: non delivery of raw materials Performance: late delivery of raw materials Performance: raw material off specifications Change in availability of raw materials
Commercial - Sales • • • • •
PROJECT
Credit: Non-receipt of sales Credit: Late receipt of sales Performance: non acceptance of products by buyer Performance: delay in acceptance of products by buyer Performance: raw material off specifications
jANUARY 2007
17
List of potential risks 2 •
Commodity markets •
Cost of raw materials Materials not yet purchased Materials purchased but not fixed Materials in inventory
•
Sale prices of produced goods Unsold products Products sold but not fixed
•
•
Price fluctuations in straight commercial open positions (purchases and sales unrelated to production)
Exchange markets •
Exchange rate fluctuation as to investments investment in USD x earnings in local currencies
•
Exchange rate fluctuation in current operations foreign sales x domestic costs
PROJECT
jANUARY 2007
18
List of potential risks 3 •
Agriculture • • • •
•
Climate – rain Water (availability, investment for sourcing, cost) Labour (quality, possibility of strikes, cost) Agricultural management (quality, availability, cost)
Industry • • • • • •
PROJECT
Equipment (unplanned maintenances, delays, costs) Supply of equipments (availability, delay, cost) Necessity of increasing industrial facilities Necessity of changing industrial process Labour (quality, possibility of strikes, cost) Industrial management (quality, availability, cost)
jANUARY 2007
19
List of potential risks 4 •
Logistics •
Availability of transportation vehicles Third parties Own investment Financing for third parties
• •
Availability of routes Availability of storage capacity Third parties Own investment Financing for third parties
• • • • • •
PROJECT
Availability of maritime terminal time Availability of ships within required regularity Cost of land transportation Cost of storage Cost of maritime terminal Cost of maritime freight
jANUARY 2007
20
List of potential risks 5 •
Financial • • • • •
•
Interest rates fluctuations Existing and expected bank debts Other existing and expected financial debts Existing and expected tax liabilities Existing and expected labour liabilities
Management •
Implementation and maintenance of required controls agriculture, industry, logistics, sales, markets accounting, taxes, labour IT infrastructure and hardware
• • •
PROJECT
Implementation and maintenance of reporting process Implementation and maintenance of risk management process Motivation of local management and labour
jANUARY 2007
21
List of potential risks 6 •
Environment •
Existing environmental liabilities (in agriculture, industry and logistics) known, but not evaluated evaluated but without payment obligation evaluated with payment obligation
• •
•
Potential environmental liabilities (in agriculture, industry and logistics) Environment-related licenses (delays, cost)
Regulatory risks • • • • •
PROJECT
Labour regulations Taxes regulations and compliance (on agriculture, industry, logistics, domestics sales, exports, earnings, assets) Accounting regulations and compliance Labour relations compliance Other regulations compliance
jANUARY 2007
22
List of potential risks 7 •
Corporate risks in local operations • • • •
•
Conflict with previous owners Conflict with remaining partners Conflict with government Conflict with competitors
Country risks • • • •
General political risk Interest rate differential from country rating Social turmoil, acts of God Countries: with local operations sources of raw materials and products sales markets
•
General corporate risks
PROJECT
jANUARY 2007
23
Agenda for a risk management plan 1 • Review and establish parameters for: • • • • • •
risk identification (list of risks in each phase of Project) organizational levels involved time-frame likelihood of occurrence impact (type of effect, monetary and non-monetary consequences) levels of risk tolerance (acceptance, acceptance with coverage, rejection)
• Define, for each risk listed: • • • • • • • • •
PROJECT
the risk possible impacts how it will be assessed (statistics, market talk, model estimation etc.) who will supply basic input, who will carry out analysis time-frame for this analysis (daily, weekly, monthly,...) process flow of the risk analysis (local level >> country level >> corporate level) possible likelihood-reduction strategies possible impact mitigation strategies initial response plan to eventual occurrence
jANUARY 2007
24
Agenda for a risk management plan 2 • Define documentation on risk management • • •
For each project, during investment phase For each operation, after investment phase For each type of occurrence, during life-time of Project
• • • • • •
To be delivered to local management To be delivered to country management To be delivered to corporate management To be delivered to regulators To be delivered to investors To local authorities
• Define functions/persons responsible for • • • •
PROJECT
Establishment of risk management plan Assessment of risks in each project, during investment phase Assessment of risks in each operation after investment phase Assessment of corporate risks
jANUARY 2007
25
Agenda for a risk management plan 3 • Month 1 • •
Define persons/functions responsible for the establishment of a Preliminary Risk Management Plan (valid until First Closing) Establish and approve this Preliminary Risk Management Plan
• Months 2 and 3 • •
Include extract of Preliminary Plan in presentations to possible Investors Work on Risk Management Plan for investment process
• After First Closing (or on assurance of go-ahead) • • • •
PROJECT
Establish and approve the Risk Management Plan for the investment process Define responsibilities for the execution of the Risk Management Plan during the investment process Organize the means and resources for this execution Beginning discussing and drafting the Operational Risk Management Plan
jANUARY 2007
26
Heitor Moura
A RISK MANAGEMENT PLAN for an investment and trading project
January 2007
A RISK MANAGEMENT PLAN for an investment and trading project
January 2007
UNICONSULT SERVIÇOS TÉCNICOS LTDA. – RIO DE JANEIRO
Risk and its management • Risk is the possibility that an event will occur, which adversely affects the achievement of objectives. • Risk management is: • • • • • •
PROJECT
an on-going process, a means to an end; carried out through plans, policies, surveys, controls, information and fundamentally by people; applied in a strategic setting, that is, directed towards objectives; applied throughout the organization, at all hierarchical levels and regional units; aimed at identifying and managing potential adverse events and situations; designed to offer reasonable assurance to its management and board of the organization's understanding of risks and of its capability of minimizing their effect.
jANUARY 2007
2
Risk Management Process
RISK MANAGEMENT PLANNING
RISK MANAGEMENT MONITORING
RISK OCCURRENCE RESPONSE
PROJECT
jANUARY 2007
3
Risk Management Process - Planning RISK MANAGEMENT PLANNING
RISK IDENTIFICATION
RISK MANAGEMENT MONITORING
RISK OCCURRENCE RESPONSE
RISK OF DELAY IN INVESTMENT DECISION
RISK ASSESSMENT
LIKELIHOOD: IMPROBABLE IMPACT: SMALL TIME-FRAME: SHORT-TERM
MITIGATION OF LIKELIHOOD
MITIGATION OF EVENTUAL IMPACT
PROJECT SCHEDULE
SIMULTANEOUS PROJECTS PARTIAL-DECISION PROCESS
PROJECT
jANUARY 2007
RISK-RESPONSE PLAN
4
Risk Management Process - Monitoring RISK MANAGEMENT PLANNING
MONITORING
RISK MANAGEMENT MONITORING
RISK OCCURRENCE RESPONSE
FOLLOW-UP OF NEGOTIATION PROCESS
CONTINUED RISK ASSESSMENT
CHANGE TO LIKELIHOOD? CHANGE TO IMPACT? CANGE TO TIME-FRAME?
REVIEW MITIGATION OF LIKELIHOOD
REVISION OF SCHEDULE
ACCELERATE NEGOTIATIONS OPEN NEW NEGOTIATIONS ETC.
PROJECT
jANUARY 2007
REVIEW MITIGATION OF EVENTUAL IMPACT
REVIEW RISK-RESPONSE PLAN
5
Risk Management Process - Response RISK MANAGEMENT PLANNING
RISK MANAGEMENT MONITORING
OCCURRENCE OF RISK EVENT
RISK OCCURRENCE RESPONSE
DECISION IS DELAYED
RESPONSE TO SITUATION
ACTION TO SPEEDEN DECISION ACTION TO SUBSTITUTE PROJECT
CONTROL OF RESPONSE
FOLLOW-UP ON ACTIONS
ASSESSMENT OF SITUATION POST-EVENT
REVIEW OF PLAN REVIEW OF RESPONSE
PROJECT
jANUARY 2007
6
Risk components
TIME-FRAME
EXPECTED IMPACT OF OCCURRENCE
LIKELIHOOD OF OCCURRENCE
POSSIBILITY OF REDUCING LIKELIHOOD
DECISION TO TAKE ON RISK
EFFECT OF RISK
POSSIBILITY OF COVERAGE
PLANNED RESPONSE TO EVENTUAL OCCURRENCE
INTENSITY OF EFFECT
EXPECTED RESIDUAL RISK
PROJECT
jANUARY 2007
7
Risk components 2 • Likelihood of occurence Probability • • • • •
0% to 1% : over 1% to 5%: over 5% to 20%: over 20% to 50%: over 50% to 100%:
Likelihood highly improbable improbable eventual probable highly probable
• Time-frame for this occurence • •
PROJECT
within 2 years after investment: short-term, i.e. there is little time to change risk conditions until 8 years after investment: medium term. i.e. there is some time to change risk conditions
jANUARY 2007
8
Risk components 3 • Effect of risk • • • • •
Delay in operations Increase in cost Loss of revenue Loss of assets Increase in liabilities
• Intensity of effect • • •
low medium high
• Result of occurence • • • • PROJECT
small: medium: great: drastic:
affects standard IRR by less than 1% p.a. affects standard IRR by over 1% up to 3% p.a. affects standard IRR by over 3% up to 5% p.a. affects standard IRR by over 5% p.a. jANUARY 2007
9
Risk coverage
INSURANCE
HEDGE MITIGATION OF EVENTUAL IMPACT GUARANTEE
OTHER CONTRACTUAL TRANSFER ABSORTION OF RESIDUAL RISK
PROJECT
jANUARY 2007
10
Risk categories combined with results 100
200
400
800
3200
100
200
400
1600
50
100
200
400
1600
50
100
200
800
20
40
80
160
640
20
40
80
320
10
20
40
80
320
10
20
40
160
5
10
20
40
160
5
10
20
80
2
4
8
16
64
2
4
8
32
1
2
4
8
32
1
2
4
16
2
4
8
32
1
2
4
16
Small
Medium
Great
Drastic
Small
Medium
Great
Drastic
SHORT TERM
MEDIUM TERM
RISK CLASSIFICATION From 1 to 7
Acceptable
From 8 to 19
Acceptable
From 20 to 31
Acceptable
From 21 to 63
Acceptable
From 64 to 99
Only acceptable if covered
From 100 to 299
Only acceptable if covered
From 300 to 499
Only acceptable if covered
500 or over PROJECT
jANUARY 2007
Not acceptable 11
Decision parameters • Acceptable risks • • •
Define risks Analyse possible reduction of likelihood and mitigation of impact Include cost of these counter-measures in investment analysis
• Risks acceptable only if covered • • • •
Define risks Analyse possible reduction of likelihood and mitigation of impact Establish coverage (insurance, hedge, security) Include cost of these counter-measures and coverage in investment analysis
• Non-acceptable risks • • • •
PROJECT
Define risks Analyse if possible counter-measures or coverage can change their classification Reject investment if this is not feasible and efficient (investment phase) or Take drastic counter-measures or divest operation (after investment phase)
jANUARY 2007
12
Main risks in each phase of Project •
Investment decisions • • •
•
Entry into each local business • •
•
Market fluctuations Lack of or reduced synergy among operations
Divestment of each business • • •
•
Technical risks Regulatory and tax context Management efficiency
Joint operation of all businesses • •
•
Resistance from local groups Delay in establishing management procedures and controls
Operation of each local business • • •
•
Delayed decision Competition for each investment Unprofitable choice
Market Protracted negotiations Competition for new investors
Post-divestment •
PROJECT
Outstanding liabilities
jANUARY 2007
13
Risks in the investment phase An example • Risk identification • Type • Level • Likelihood • Impact • Time-frame
PROJECT
jANUARY 2007
14
RISK
TYPE
LEVEL
LIKELIHOOD
IMPACT
TIME-FRAME
Organization Human factor
1-Project
2-improbable
1-small
3-short-term
Human factor
1-Project
3-eventual
1-small
3-short-term
3 Delay in making decision
Organization Human factor
1-Project
2-improbable
1-small
3-short-term
4 Delay in concluding negotiations
Economic Human factor
1-Project
3-eventual
2-medium
3-short-term
5 Back-trading by sellers
Economic Human factor
1-Project
4-probable
2-medium
3-short-term
6 Change in country market context
Economic
2-Country
5-highly probable
3-great
2-medium-term
7 Change in world market context
Economic
3-Organization
5-highly probable
3-great
3-short-term
8 Change in country business context
Economic
2-Country
3-eventual
3-great
2-medium-term
9 Change in world business context
Economic
3-Organization
3-eventual
3-great
3-short-term
Delay in establishing and executing documents
Organization Human factor
1-Project
2-improbable
1-small
3-short-term
11 Inclusion of undesirable/incorrect clause
Organization Human factor
1-Project
1-highly improbable
2-medium
3-short-term
12 Non delivery of mandatory licenses
Regulatory Human factor
1-Project
2-improbable
2-medium
3-short-term
13 Delay in delivery of mandatory licenses
Regulatory Human factor
1-Project
3-eventual
1-small
3-short-term
Non discovery of unacceptable risks or liabilities
Organization Human factor
1-Project
2-improbable
4-critical
2-medium-term
Criminal
1-Project
2-improbable
4-critical
2-medium-term
Cultural Human factor
1-Project
4-probable
1-small
3-short-term
1 Delay in identifying prospects 2
10
14
Delay and/or non supply of information by sellers
15 Fraud in delivered information 16
Resistance from local management / labour PROJECT
jANUARY 2007
15
RISK
GUARANTEE INSURANCE HEDGE POSSIBILITIE POSSIBILITIES POSSIBILITIES S
RESIDUAL RISK
REDUCING LIKELIHOOD
MITIGATION OF IMPACT
Pro-active search
Simultaneous projects
None
None
None
Low
Documentation list Local follow-up Expliciting the requirement Expliciting consequences
Partial-decision process
None
None
None
Medium
3 Delay in making decision
Project schedule
Simultaneous projects Partial-decision process
None
None
None
Low
4 Delay in concluding negotiations
Project schedule
Simultaneous projects
None
None
None
Medium
Clear negotiation Reputable partners
Simultaneous projects Competitive negotiation Analysis parameters with expected time-frame average Analysis parameters within expected time-frame average Sensibility analysis within expected parameter range Sensibility analysis within expected parameter range
None
None
None
Medium
Country risk
Price hedge
None
Medium
None
Price hedge
None
Low
Country risk
Price hedge
None
Medium
None
Price hedge
None
High
Simultaneous projects
None
None
None
Medium
None
None
None
None
Low
None
None
None
None
1 Delay in identifying prospects Delay and/or non supply of information 2 by sellers
5 Back-trading by sellers 6 Change in country market context
None
7 Change in world market context
None
8 Change in country business context
None
9 Change in world business context
None
10
Delay in establishing and executing documents
11 Inclusion of undesirable/incorrect clause 12 Non delivery of mandatory licenses 13 Delay in delivery of mandatory licenses 14
Non discovery of unacceptable risks or liabilities
15 Fraud in delivered information 16
Resistance from local management / labour
PROJECT
Competent legal advisors Internal review Competent legal advisors Internal review Competent legal advisors Local representatives Competent legal advisors Local representatives
Contractual obligation to deliver correct information Contractual obligation to deliver correct information
Comprehensive due dilligence
Contractual generic guarantees
None
None
Contractual obligation
Low
Contractual obligation to deliver correct information
None
None
Contractual obligation
Low
Contractual generic guarantees
None
None
None
High
Comprehensive due dilligence Adequate confidentiality procedures Winning local management Communication program with local stakeholders
jANUARY 2007
Contractual obligation Contractual obligation
Low Medium
16
List of potential risks 1 •
Commercial - Sourcing • • • •
•
Performance: non delivery of raw materials Performance: late delivery of raw materials Performance: raw material off specifications Change in availability of raw materials
Commercial - Sales • • • • •
PROJECT
Credit: Non-receipt of sales Credit: Late receipt of sales Performance: non acceptance of products by buyer Performance: delay in acceptance of products by buyer Performance: raw material off specifications
jANUARY 2007
17
List of potential risks 2 •
Commodity markets •
Cost of raw materials Materials not yet purchased Materials purchased but not fixed Materials in inventory
•
Sale prices of produced goods Unsold products Products sold but not fixed
•
•
Price fluctuations in straight commercial open positions (purchases and sales unrelated to production)
Exchange markets •
Exchange rate fluctuation as to investments investment in USD x earnings in local currencies
•
Exchange rate fluctuation in current operations foreign sales x domestic costs
PROJECT
jANUARY 2007
18
List of potential risks 3 •
Agriculture • • • •
•
Climate – rain Water (availability, investment for sourcing, cost) Labour (quality, possibility of strikes, cost) Agricultural management (quality, availability, cost)
Industry • • • • • •
PROJECT
Equipment (unplanned maintenances, delays, costs) Supply of equipments (availability, delay, cost) Necessity of increasing industrial facilities Necessity of changing industrial process Labour (quality, possibility of strikes, cost) Industrial management (quality, availability, cost)
jANUARY 2007
19
List of potential risks 4 •
Logistics •
Availability of transportation vehicles Third parties Own investment Financing for third parties
• •
Availability of routes Availability of storage capacity Third parties Own investment Financing for third parties
• • • • • •
PROJECT
Availability of maritime terminal time Availability of ships within required regularity Cost of land transportation Cost of storage Cost of maritime terminal Cost of maritime freight
jANUARY 2007
20
List of potential risks 5 •
Financial • • • • •
•
Interest rates fluctuations Existing and expected bank debts Other existing and expected financial debts Existing and expected tax liabilities Existing and expected labour liabilities
Management •
Implementation and maintenance of required controls agriculture, industry, logistics, sales, markets accounting, taxes, labour IT infrastructure and hardware
• • •
PROJECT
Implementation and maintenance of reporting process Implementation and maintenance of risk management process Motivation of local management and labour
jANUARY 2007
21
List of potential risks 6 •
Environment •
Existing environmental liabilities (in agriculture, industry and logistics) known, but not evaluated evaluated but without payment obligation evaluated with payment obligation
• •
•
Potential environmental liabilities (in agriculture, industry and logistics) Environment-related licenses (delays, cost)
Regulatory risks • • • • •
PROJECT
Labour regulations Taxes regulations and compliance (on agriculture, industry, logistics, domestics sales, exports, earnings, assets) Accounting regulations and compliance Labour relations compliance Other regulations compliance
jANUARY 2007
22
List of potential risks 7 •
Corporate risks in local operations • • • •
•
Conflict with previous owners Conflict with remaining partners Conflict with government Conflict with competitors
Country risks • • • •
General political risk Interest rate differential from country rating Social turmoil, acts of God Countries: with local operations sources of raw materials and products sales markets
•
General corporate risks
PROJECT
jANUARY 2007
23
Agenda for a risk management plan 1 • Review and establish parameters for: • • • • • •
risk identification (list of risks in each phase of Project) organizational levels involved time-frame likelihood of occurrence impact (type of effect, monetary and non-monetary consequences) levels of risk tolerance (acceptance, acceptance with coverage, rejection)
• Define, for each risk listed: • • • • • • • • •
PROJECT
the risk possible impacts how it will be assessed (statistics, market talk, model estimation etc.) who will supply basic input, who will carry out analysis time-frame for this analysis (daily, weekly, monthly,...) process flow of the risk analysis (local level >> country level >> corporate level) possible likelihood-reduction strategies possible impact mitigation strategies initial response plan to eventual occurrence
jANUARY 2007
24
Agenda for a risk management plan 2 • Define documentation on risk management • • •
For each project, during investment phase For each operation, after investment phase For each type of occurrence, during life-time of Project
• • • • • •
To be delivered to local management To be delivered to country management To be delivered to corporate management To be delivered to regulators To be delivered to investors To local authorities
• Define functions/persons responsible for • • • •
PROJECT
Establishment of risk management plan Assessment of risks in each project, during investment phase Assessment of risks in each operation after investment phase Assessment of corporate risks
jANUARY 2007
25
Agenda for a risk management plan 3 • Month 1 • •
Define persons/functions responsible for the establishment of a Preliminary Risk Management Plan (valid until First Closing) Establish and approve this Preliminary Risk Management Plan
• Months 2 and 3 • •
Include extract of Preliminary Plan in presentations to possible Investors Work on Risk Management Plan for investment process
• After First Closing (or on assurance of go-ahead) • • • •
PROJECT
Establish and approve the Risk Management Plan for the investment process Define responsibilities for the execution of the Risk Management Plan during the investment process Organize the means and resources for this execution Beginning discussing and drafting the Operational Risk Management Plan
jANUARY 2007
26
Heitor Moura
A RISK MANAGEMENT PLAN for an investment and trading project
January 2007
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