Enterprise risk management in the private equity world
As featured on Forbes.com
Private equity (PE) firms are enjoying record years in terms of available capital and deal flow. But PE firms that are not focused on enterprise risk management (ERM) across their portfolio are at risk. There is an unprecedented level of disruption, change and risk in every industry that must be assessed and addressed in order to protect investments and valuations. Because of the ubiquity of social media – and the speed at which social media mobs form - reputational risks are at an all-time high. PE firms need to take heed.
In order to be most effective, risk oversight must be embedded in the corporate culture, with buy-in at all levels of the organization—from the Board of Directors and executive management team to middle management and front-line employees. Without a comprehensive top-to-bottom commitment for managing risk - and a dedication to live by the enterprise risk management principles established - the approach is unlikely to succeed.
All organizations exist in a state of pre-crisis. Now is the perfect time to prepare and implement crisis planning to help protect your businesses in the event of a crisis. Most crises can be reasonably predicted and a formal exercise to identify potential scenarios and formalize response plans is an investment that every PE firm should make in their portfolio companies.
Enterprise risk management offers an additional benefit beyond protecting reputation. Studies show formalized and mature enterprise risk management approaches that have sponsorship at the highest levels of an organization and cascade throughout the entire business lead to higher valuations (Farrell, Gallagher; The Journal of Risk and Insurance, 2014).