Effective risk management underpins the successful delivery of our strategy. Integrity, rigour and accountability are central to our values and culture at 3i and are embedded in our approach to risk management.
Understanding our risk appetite and culture
As both an investor and asset manager, 3i is in the business of taking risk in order to seek to achieve its targeted returns for investors and shareholders. The Board approves the strategic objectives that determine the level and types of risk that 3i is prepared to accept. The Board reviews 3i’s strategic objectives and risk appetite at least annually.
In order to support its institutional asset management capability, 3i’s risk appetite policy is built on rigorous and comprehensive investment procedures and conservative capital management.
Integrity, rigour and accountability are central to our values and culture and are embedded in our approach to risk management. Our Investment Committee which has oversight of the investment pipeline development and approves new investments, significant portfolio changes and divestments, is integral to embedding our institutional approach across the business. It ensures consistency and compliance with 3i’s financial and strategic requirements, cultural values and appropriate investment behaviours. Members of the Executive Committee have responsibility for their own business or functional areas and the Group expects individual behaviours to meet the Group’s high standards of conduct. All employees share the responsibility for upholding 3i’s strong control culture and supporting effective risk management. Senior managers, typically those who report to Executive Committee members, are required to confirm their individual and business area compliance. In addition, all staff are assessed on their compliance with the Group values as part of their annual appraisal.
The following sections explain how we control and manage the risks in our business. It outlines the key risks, our assessment of their potential impact on our business in the context of the current environment and how we seek to mitigate them.
3i's risk appetite is defined by its objective to invest proprietary capital in assets that generate sufficient proceeds to fund new opportunities and allow material shareholder distributions as well as good levels of cash income.
The substantial majority of the Group’s capital is invested in Private Equity. Private Equity investments are subject to a range of factors which include:
- Return objective: individually assessed but subject to a target 2x money multiple over three to five years
- Geographic focus: core markets of northern Europe and North America
- Sector expertise: focus on Business Services, Consumer and Industrials
- Vintage: invest c.€500 million–€750 million per annum in four to seven new investments in companies with an enterprise value range of €100 million–€500 million at investment
Our other two businesses are more modest users of proprietary capital but each investment is subject to rigorous review.
3i adopts a conservative approach to managing its capital resources. There is no appetite for significant structural gearing at the Group level although short-term tactical gearing will be used. In addition, we have a limited appetite for the dilution of capital returns as a result of operating and interest expenses. All three of our business lines, Private Equity, Infrastructure and Debt Management also generate cash income to mitigate this risk.
Approach to risk governance
The Board is responsible for risk assessment, the risk management process and for the protection of the Group’s reputation and brand integrity. It considers the most significant risks facing the Group and uses quantitative analyses, such as the vintage control which considers the portfolio concentration by revenue, geography and sector, and liquidity reporting, where appropriate.
Non-executive oversight is also exercised through the Audit and Compliance Committee which focuses on upholding standards of integrity, financial reporting, risk management, going concern and internal control.
The Board has delegated the responsibility for risk oversight to the Chief Executive. He is assisted by the Group Risk Committee (“GRC”) in managing this responsibility, guided by the Board’s appetite for risk and any specific limits set. The GRC maintains the Group risk review, which summarises the Group’s principal risks, associated mitigating actions and key risk indicators, and identifies any changes to the Group’s risk profile. The risk review is updated quarterly and the Chief Executive provides quarterly updates to each Audit and Compliance Committee meeting where the Committee members contribute views and raise questions. The last risk review was completed in May 2016.
The risk framework is further augmented by a separate Risk Management Function which has specific responsibilities under the European Alternative Investment Fund Managers Directive (“AIFMD”). It meets ahead of the GRC meetings to consider the key risks impacting the Group, and any changes in the relevant
period where appropriate. It also considers the separate risk reports for each AIF managed by the Group, including areas such as portfolio composition, portfolio valuation, operational updates and team changes, which are then considered by the GRC.
Assurance over the robustness and effectiveness of the Group’s overarching risk management processes and compliance with relevant policies is provided to the Audit and Compliance Committee through the independent assessment by Internal Audit and the work of Group Compliance on regulatory risks.
Risk governance structure
|Overview of risk management framework and governance structure
Treasury Transactions Committee
Audit and Compliance Committee
- Considers risk implications of specific
treasury transactions as required.
- A quorum of members meet as
- Determines the Group’s risk appetite
as part of strategy setting.
- Overall responsibility for maintaining
a system of internal controls that
ensures an effective risk management
and oversight process operates
across the Group.
- Considers risks to the Group’s brand,
values and reputation as required.
- Meets at least six times a year.
- Receives reports from the Head of
Internal Audit on the Group’s risk
management processes and system
of internal controls.
- Receives reports from the Head of
Group Compliance on regulatory
and compliance matters.
- Receives reports from the Head of Tax
on Group tax management.
- Updated at each meeting on the
outputs of the latest Group Risk
Committee meeting with the
opportunity to contribute views
or raise questions.
- Meets at least four times a year.
Group Risk Committee
- Considers risk in the context of
individual investments, portfolio
management decisions and
- Meets as required.
- Deals with potential conflict issues.
- Meets as required.
- Principal decision-making body in
respect of managing the business.
- Meets monthly.
- Delegated responsibility for risk
management and oversight across the
Group, reflecting the Board’s appetite
for risk and any specific limits set.
- Maintains the Group risk review, which
summarises the Group’s risk exposure
and associated mitigation or response
plan based on risks identified.
- Meets four times a year to consider
the Group risk review, including
adequacy of risk mitigation and
- Chairman provides update at each
meeting of the Audit and Compliance
- Committees of the Board
- Committees of the Chief Executive
- Independent review of potential conflict issues
- Risk reporting to Audit and Compliance Committee
Risk management framework
The Group’s risk management framework is designed to support the delivery of the Group’s strategic objectives. The key principles that underpin risk management in the Group are:
- The Board and the Executive Committee promote a culture in which risks are identified, assessed and reported in an open, transparent and objective manner; and
- The over-riding priority is to protect the Group’s long-term viability and reputation and produce sustainable, medium to long-term cash-to-cash returns.
Managing the Group’s Environmental, Social and Governance (“ESG”) risks is central to how we do business and a key part of our risk management framework. It also forms part of our half-yearly portfolio company reviews.
In practice, the Group operates a “three lines of defence” framework for managing and identifying risk. The first line of defence against outcomes outside our risk appetite is the business function and the respective Managing Partners across Private Equity, Infrastructure and Debt Management.
Line management is supported by oversight and control functions such as finance, human resources and legal which constitute the second line of defence. The Compliance function is also in the second line of defence; its duties include reviewing the effective operation of our processes in meeting regulatory requirements.
Internal Audit provides independent assurance over the operation of controls and is the third line of defence. The internal audit programme includes the review of risk management processes and recommendations to improve the internal control environment.