Basic HTML Version
Annual report 2011
56
3 Financial Risk Management
3.1 Overview of EIF Risk Management
EIF aligns its risk management systems with changing eco-
nomic conditions, regulatory standards and best market
practices. Internal systems are in place to monitor, man-
age and report on the main risks inherent to its operations.
An independent Risk Management and Monitoring divi-
sion (RMM) reports directly to the Deputy Chief Executive
who in turn is appointed by EIF’s Board of Directors. This
segregation of duties and a “four-eyes” principle ensures
an unbiased review of EIF’s business activities. More
over, within the European Investment Bank (EIB) Group
context, RMM operates in close contact with the EIB’s
Risk Management Directorate. RMM is organised into
three main teams: Private Equity (PE) Risk Management,
Portfolio Guarantees & Securitisation (G&S) Risk Man-
agement and Operations (OPS) covering both business
lines. RMM covers own resources, and mandates man-
aged by EIF on behalf of the related parties (i.e. the EIB
and the EC) and other mandators. For more details on EIF
mandates please see note 6.
RMM covers EIF’s PE and G&S activities, monitors risk
regularly on individual transactions as well as at the port-
folio level, and assesses new and existing transactions.
For this purpose, RMM:
■
reviews the risk management methodologies, process-
es, and instruments used in EIF’s operations;
■
issues independent opinions on all new transaction
proposals;
■
independently reviews internal ratings (G&S)/grades
(PE) assigned to transactions;
■
performs ongoing deal surveillance, monitoring and
administration;
■
applies stress testing scenarios on both G&S and PE
portfolios;
■
checks risk limits;
■
assesses regulatory and economic capital allocations,
and
■
monitors, benchmarks and forecasts portfolio evolution.
The Investment & Risk Commit tee (IRC) chaired by the
Deputy Chief Executive is responsible for reviewing new
transactions and all risk and investment-related aspects of
the existing EIF portfolio, inter alia: reviewing the relevant
market risk events, reviewing the portfolio and transac-
tion rating/grading movements, advising on impairment
of transactions and supporting the decision of the Chief
Executive and the Deputy Chief Executive to present trans-
actions to the Board of Directors for their approval.
3.2
Private Equity (PE)
3.2.1
Background
EIF operates as a fund of PE funds, i.e. EIF acts as a limited
partner. These minority stakes in funds catalyse commit-
ments from a wide range of investors. EIF’s PE operations
are focused on early-stage and seed capital, and on mid-
and later-stage investments.
Valuation review
Monitoring includes the valuation review of PE funds. This
process is divided into several stages to achieve what is
known as Operational Adjustment:
■
Reporting: collection of financial quarterly reports sent
by the fund managers as basis for valuation.
■
Valuations: assessment as to whether valuations are
in line with best market practice and applicable in-
dustry valuation guidelines. Through its monitoring,
EIF produces reports that capture events relevant for
valuation, such as:
■
Reviews of financial reporting received from PE
funds.
■
Monitoring visits.
■
Any significant information with potential valua-
tion impact.
■
Subsequent event reviews.
■
Impairments of investments: as stated in note 3.1, the
IRC decides on the transactions impairments.
■
Classification of funds: depending on the outcome of
the monitoring outlined above, funds are classified into
three categories as described in note 2.3.2.