This is the last in a series of three articles on risk and PE firms, this installment will deal with the definition of risk. Mitigating PE risk is not one-time thing but an on-going process. For PE firms, it begins with the due diligence of a new deal and continues through with their portfolio companies until the exit. With financial risk defined, identify and measured, focus can now be spent on mitigating. Gap analysis provides the road map to mitigating the risk as it measures the amount of risk between a company and its industry standard. However, reducing these risks can take time and require a combination to different approaches and actions. What-if scenarios Using what-if analysis various scenarios can be tested and evaluated, both individually and collectively, to see the ...

This is the second in a series of three articles on risk and PE firms, this installment will deal with the definition of risk. Once there is a clear definition of and means for identifying risk, it can be can be measured.  Risk can be broken down into levels of degree along with the associated financial impact on a company. To better measure and better understand risk as it is spread across an industry, benchmarking segments an industry into five threshold points; the bottom 10% and 25%, median, and top performing 25% and 10%.  These levels help to define the how critical risk is and how a company is compared to its industry. As illustrated below, a company’s comparative value using the current ratio is measured across the industry. Using the ...

This is the first in a series of three articles on risk and PE firms, this installment will deal with the definition of risk. In a recent Axial study on Evaluating Risk and Return in Private Equity, most respondents (76%) said they do not regularly measure risk. This raises the question—is this due to a lack of a clear definition of risk, the lack of available data to identify and measure risk or both? Financial risk refers to those factors that could affect a company’s ability to make a profit. It comes in many forms and can be internal or external as well as strategic, financial, operational, compliance, etc. For a private equity firm, the primary financial risk is the possibility that investors will lose their money or not get the ...

Many companies today rely on key performance indicators (KPIs) to gauge how effectively they are meeting various key business objectives. Tactical in nature, KPIs can be either lagging or leading indicators on a company’s performance. Some lagging indicators simply tell you how you performed and have little to no value in predicting future performance. (Examples include measuring working capital, sales growth, gross and net profit margins.) Leading KPIs offer guidance on future results, such as customer satisfaction or manufacturing quality control like Six Sigma. But KPIs by definition only measure the performance of a company against itself, such as comparing one month to the next, thereby often failing to effect any positive change. Too often, KPIs become static within an organization over time and are glanced over by management. Another option ...