Juggling investment project risk

There is a direct relationship between risk and the size of returns expected by a potential investor, e.g. higher risks result in higher returns being expected by investors. Successful projects implement both structural and management solutions to reduce and eliminate risks, so as to align project delivery with investor and debt provider risk appetite. Successful projects also adapt their approach as the risk profile changes over a project's life.

Red Jay Associates has experience of having worked on a wide range of investment deals, covering a spectrum of sectors, size, complexity and financing needs. We can quickly identify a project’s strengths and weaknesses and provide appropriately tailored assistance in implementing risk reduction solutions.

Types of risk

There are many frameworks which can be applied to classify risk, Red Jay Associates uses the following categories:

1. Financial – risks relating to achievement of financial returns, generation of cash or values of assets and liabilities. This includes commodity price risk, foreign exchange and interest rates, market, liquidity and counterparty credit risks

2. Technical and Compliance – risks arising from design of a product or service, and applicable contract and regulation requirements.

3. Operational – the risk of loss resulting due to inadequate or failure of processes, people and systems or from external events. This definition includes legal risk.

4. Strategic – risks that affect or are due to an organisation’s business model.

Risks of infrastructure financing projects

Infrastructure projects are particularly exposed to losses due to the significance level of financial outlay and time required for construction. When project financing is applied to infrastructure projects there is a particularly acute need to focus on risks to ensure that there is either mitigation in place or to provide clarity as to which party (e.g. shareholders or debt providers) should bear the financial consequences of risk incidences.

Risks can evolve and change in their potential impact over the life of an investment project, for example an error an engineering design or IT specification flaw, if undetected at an early stage, could cost a great deal to detect and remediate at a later date. Failing to identify a significant risk and ensure that the correct party bears any loss can result in delays in construction, revision to documents or potentially failure to complete the project if the delays render it uneconomic.

Typical project finance structures have the following risk reduction measures in place:

Effective risk management strategy

Risk considerations need to be factored into a project from the very beginning of development and should be managed across all disciplines involved in delivery. It is generally recognised that (i) board support of a positive risk culture, (ii) structured risk management processes and (iii) sufficient resourcing are three of the most important components of a successful risk management strategy.

Risk management in itself does not guarantee investment success but it may avoid failure!

===================================================================

Red Jay Associates Limited is a specialist finance consultancy advising on corporate finance and business transformation, we would be very happy to discuss your business and develop a proposal for how we could support your needs. For more information please contact Ed Rogers on 07771 913528 or mailto: edmond.rogers@redjay.co.uk. Visit our website on www.redjay.co.uk