White Papers written by Cendrowski Corporate Advisors
Investing in Projects Using Enterprise Risk Management
When practitioners discuss enterprise risk management (ERM) in an investment setting they often focus on evaluating the negative aspects associated with risk: How much can a portfolio lose over a given amount of time (value at risk)? What is the probability that a project will fail? However, while the downsides associated with risks are unquestionably important, the upsides or benefits of risk are equally significant. The act of taking risks is what produces successful businesses and entrepreneurs; without risk, as the adage goes, there is no reward. By quantitatively analyzing the risk/reward tradeoff of investments, firms can gain better understanding of the consequences associated with risky events and also the benefits presented by them. Furthermore, by analyzing the riskiness of projects with respect to given macroeconomic, industry, and firm-specific factors, firms can help minimize the chance of overexposure to risks.
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Risk Management for Limited Partners
Private equity (PE) finance is a central component of the U.S. economy. PE funds, including those specializing in venture capital, buyouts, and mezzanine finance, poured nearly $90 billion into U.S. portfolio companies in 2008 alone. As shown in Figure 1, PE investments in U.S. portfolio companies have totaled nearly $1 trillion over the past 20 years. These investments are used by portfolio-company entrepreneurs to help expand their firms and managers at mature firms to remake their organizations into more nimble entities.
