Risk management is an integral part of our business and is key to Oakley’s success.
We maintain a robust strategy for managing risks, which encompasses:
Evaluation of emerging risks and assessing potential implications for the Company and any mitigation that can be applied
Maintenance of a comprehensive risk management framework including the risk appetite statement, the risk register and the risk policies and procedures
Effective communication between our Board of Directors and the Investment Adviser through regular risk reports, and discussions.
Proactive risk management
Our approach to risk is proactive, underpinned by our unwavering commitment to developing and utilising our risk management procedures in a manner that adapts to the evolving requirements of our business and the surrounding landscape.
We work closely with external advisers and specialists as necessary to validate OCI's approach to risk management and gain the benefit of the latest market practice and insights.
Increased risk oversight
The past financial year was marked by significant geopolitical risks, including the conflict in the Middle East, the continued war in Ukraine and escalating tensions between China and Taiwan. These factors among others, led to a surge in core inflation rates, higher interest rates and the contraction of available credit across various currencies, creating a complex operational environment for Private Equity markets. As a result, both Oakley and OCI had to carefully assess investment opportunities, adapt investment structures, and refine financial projections.
Furthermore, the increasing cost of borrowing and the rebalancing of global capital allocation towards debt investments resulted in a need for even more prudent risk management regarding OCI’s risks, with a particular focus on liquidity, credit and portfolio risks. In response, the Risk Committee has focused on regular stress testing on its cash forecasts and increasing OCI’s flexibility around cash management through the expansion of its credit facility. As the cost of borrowing has also significantly impacted the availability and pricing of fund-level facilities, the Risk Committee has also expanded its focus on the leverage and the credit facilities at Oakley fund level to assess the impact on the expected capital call demands from these funds. As the broader market experiences contraction in multiples and a slowdown of economic growth, the Board has increased oversight on valuations with a focus on earnings quality and EBITDA growth.
To ensure a well-rounded approach to risk, the Risk Committee also initiated to refresh and enhance OCI’s risk policies and procedures, risk framework and risk appetite statement. As part of this exercise, Oakley engaged a third-party to review the risk register, risk appetite and overall approach to risk management, resulting in some updates to the risk registers, controls and risk indicators and leading to the digitalisation of OCI’s risk and control framework within a governance, risk, and compliance (GRC) system. This system will help streamline operational risk assessment for OCI and will form a key part of the quarterly risk reports reviewed by the Risk Committee.
Key risks
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PR1 Liquidity risk
PR2 Portfolio risk
PR3 Credit risk
Other core risks
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OR4 Performance risk
OR5 Operational risk
OR6 ESG risk
OR7 Cyber risk
Key risks
1
Liquidity risk
Potential impact Liquidity risk refers to the potential failure of OCI to meet its commitments to the funds, pay annual dividends or conduct share buy-backs, which may ultimately impact the share price and decrease returns for shareholders.
Risk tolerance
0 2022
0 2023
Mitigation
The Board closely monitors cash flow forecasts and receives regular stress tests that it assesses in making investment decisions and in deciding how to conduct its cash management.
Positioning
OCI signed a new revolving credit facility (RCF) with a two-year committed term of £175 million, with a potential uncommitted accordion of a further £50 million. During 2023, OCI committed €190 million to Oakley Origin Fund II and $100 million to Oakley Touring Fund I. At 31 December 2023, the cash held was £207 million and the £175 million RCF was undrawn, giving OCI access to £382 million of liquidity. The outstanding commitments to the funds at that date were £1,015 million, not all of which are expected to be called and the remainder is expected to be called over the next 5 years.
2
Portfolio risk
Potential impact Portfolio risk principally focuses on valuation risk and concentration risk. Valuation risk looks at the risk of a decline in the valuation of privately held assets, resulting principally from a reduction in comparative multiples in the market or from underperformance of the assets. Concentration risk arises from overexposure to a particular investment strategy, sector, geography and/or currency.
Risk tolerance
0 2022
0 2023
Mitigation
Fund valuations are subject to quarterly review. The Audit Committee engages with the members of the valuations team of Oakley. The Board closely tracks the ongoing performance of portfolio companies. The Board considers the valuation methodologies being applied and in particular, the quality of comparable trading multiples used and their direction of travel.
Metrics are established and monitored to gauge investment concentration based on sector and individual commitment as well as geographical exposure. The OCI Board receives a quarterly risk report with OCI concentration metrics, considering both acquisition cost and the most recent Net Asset Value (NAV) as well as geographic exposure.
Positioning
Inherent valuation risk naturally increased as a result of macro-economic uncertainties, market volatility and higher interest rates, which led to a retrenchment of valuation multiples.
The portfolio has proved resilient with continued good earnings growth and an increase in valuations, that have been more than sufficient to neutralise the contraction of comparable trading multiples which have been observed in the market. The market for exits was softer in 2023 although OCI did see the significant exit of IU Group from Fund III.
OCI has further diversified its exposures across the Oakley family of funds, including the Oakley Origin Fund II and Oakley Touring Fund I.
3
Credit risk
Potential impact This is the risk that a borrower will default on its debt obligations, either by failing to make timely payments or by not repaying the debt at all.
Risk tolerance
0 2022
0 2023
Mitigation
During 2023, OCI continued to hold its direct debt positions in North Sails, Fund I and Time Out. In December 2023, OCI’s debt positions in North Sails were converted into preferred equity providing improved security and stronger incentives for accelerated repayment as well as potential equity upside. Separately, OCI’s loan to Fund I was settled in Time Out shares. OCI still has a direct loan to Time Out of £6 million and the OCI Board continues to monitor the risks arising from this position, with emphasis on the operating performance, quality of earnings, forecasts and balance sheet strength of Time Out.
Positioning
North Sails’ financial performance has improved during the year with an increase in revenue and EBITDA growth. This simplifies North Sails capital structure and improves the ability to attract new investors, improving the position of OCI.
Time Out’s performance also improved as it emerges from the challenges of the covid pandemic with an increase of the share price of 43% during 2023.
Other core risks
4
Performance risk
Potential impact This is the risk of returns to OCI’s shareholders underperforming against the market and peers, with the potential impact on share price, reduced share liquidity and reputational damage.
Risk tolerance
0 2022
0 2023
Mitigation
Quarterly reporting of NAV combined with transparent communication in business progress are designed to fully inform investors, potential investors and the wider market. Confidence in the NAV is established through a robust valuation process at Oakley. On an annual basis, the valuations prepared are subject to an audit by the external auditor and an independent valuation is prepared for each investment by a third party advisor. The valuations are produced for each investment. OCI also receives an independent valuation on the North Sails position by a third-party advisor.
Positioning
NAV growth has been stable over the course of 2023 while the discount to NAV has decreased compared with previous year, closing 2023 at 28% vs 37% in 2022.
Shareholder engagement activities were further developed in 2023 with a significant increase in the number of social media engagements and articles. These efforts have been effective in further developing a diversified shareholder base with a view to strengthening OCI’s liquidity. Despite the challenging macro-economic environment and the contraction of multiples in comparable businesses, the investments performed positively in 2023, leading to strong OCI NAV and share performance. OCI outperformed the FTSE-All Share benchmark by 15%, with the OCI share price increasing by 18%, against only 4% for the FTSE-All Share.
5
Operational risk
Potential impact OCI outsources administrative, advisory, finance and operational functions to Oakley.
Inadequate or failed internal processes could lead to operational performance risk and regulatory risk.
Risk tolerance
0 2022
0 2023
Mitigation
The Board regularly engages with Oakley via the Management Engagement Committee to assess the quality and price of the services it receives from Oakley. The Audit Committee also plays an active part in reviewing controls and processes.
The Risk Committee receives a quarterly report on administrative, advisory and operational matters as well as risk controls and a periodical compliance report.
Positioning
Oakley continues to demonstrate a strong commitment to the development of its administrative, advisory and operational services to the Company as well as a continued focus on risk management, controls and reporting.
Oakley has also contracted an independent third party to perform a thorough quality assurance assessment to identify potential gaps in the Company’s risk matrix and to ensure Oakley has implemented a best-in-class risk programme.
No significant control weaknesses have been identified and a governance, risk and compliance (GRC) software tool was successfully implemented during 2023.
Operational risks of OCI remain low however, the Risk Committee will continue to work closely with Oakley on the risk programme throughout 2024.
6
ESG risk
Potential impact Failure to integrate ESG themes into investment strategy and operating models could result in sustainability, reputational and performance risks.
Risk tolerance
0 2022
0 2023
Mitigation
OCI considers embedding ESG practices into its investing and operating models at Oakley to be part of its overall strategy for success. The Board is encouraged by the manner in which ESG initiatives are being thoughtfully implemented across Oakley and continues to monitor progress. The Board received a number of internal and external training sessions across the ESG spectrum to ensure it remains abreast of market and regulatory developments.
Positioning
Oakley's sustainability programme is based on three key themes:
- Energy and climate change: the Manager is committed to measuring and understanding its carbon footprint. Portfolio companies are asked to report on their carbon footprint and energy usage annually. Climate risk and a climate strategy are a development priority for the Manager.
- Equity, diversity and inclusion (EDI): The emphasis on EDI extends to areas like recruitment, retention, culture and career development. Oakley team's composition has evolved from 30% women to 47%, with a focus on developing talent for leadership roles through fair performance management and career development. The OCI Board now has a 50-50 gender balance. An EDI Committee meets regularly to monitor progress. Across the portfolio, the Manager monitors the diversity metrics of its portfolio companies and engages with management on employee engagement programmes.
- Cybersecurity and data privacy: the Manager works with external experts to monitor portfolio cyber risk and maturity, with annual reviews and improvement road maps developed for a majority of the portfolio. A cyber insurance review has been undertaken. Robust insurance and incident response protocols are introduced where appropriate. Firm-wide cybersecurity is further discussed in the next section.
The Board actively monitors and engages with the Manager’s ESG initiatives and ensures it continues to prioritise value creation opportunities, compliance with regulations and transparent reporting.
7
Cyber risk
Potential impact The risk of financial loss, disruption, damage to reputation and regulatory sanction arising from failure of data controls and information technology systems.
Risk tolerance
0 2022
0 2023
Mitigation
OCI does not operate any IT systems or manage any electronic data stores itself. Exposure to cybersecurity risk arises primarily through delegated services conducted by Oakley and its affiliates and the portfolio companies themselves. In this respect, the Management Engagement Committee considers IT controls and cybersecurity activities as part of its annual review of Oakley and takes comfort from the third-party quality assurance assessments conducted on Oakley’s own operational risk and control frameworks (including cybersecurity).
The Risk Committee receives regular reports on cybersecurity initiatives at both the Oakley and portfolio company levels, including the results of cybersecurity risk assessments and the internal quarterly risk assessment by Oakley Group IT department.
Positioning
Cybersecurity protocols continue to be expanded across OCI, Oakley and the companies in which Oakley’s funds invest in. In 2023, Oakley worked with an external cybersecurity consultant to run a thorough cyber assessment on Oakley’s IT systems and test its procedures. The results of this assessment have been added to an overall programme of continuous cybersecurity improvement. Assessments such as these are part of that continual process of improvement and will continue in 2024.
Emerging risks
Geopolitical, artificial intelligence and environmental risks
2023 brought with it significant geopolitical events, including the continued war in Ukraine, the conflict in the Middle East and escalating tensions between China and Taiwan. These challenges are expected to continue into 2024.
The upcoming year will be marked by a wave of elections in countries accounting for nearly 60% of the global GDP, leading to possible fundamental changes in global political agendas. Elections directly relevant to OCI include the European Parliament elections, impacting climate regulation and energy policies; the UK parliamentary elections, affecting trade dynamics post-Brexit, tax and socio-economic matters impacting education among other things; and the US presidential election, where a new administration could shift foreign policy, impacting relationships with Europe and the global economy. The evolution of AI policy and regulation during this election cycle is also a crucial development, having the capability to potentially affect popular trust in public institutions and create macro-economic turmoil. AI may also drive growth across the Touring Fund investments in particular and have a positive effect in other sectors where Oakley invests such as Technology and Education. These changes in 2024 could have further repercussions on global and localised economies, potentially impacting supply chains and the green technology subsidy race.
In 2023, the Pillar 2 Global Minimum Tax (GloBE) rules were integrated into the Corporate Income Tax Act 2023 in Bermuda, with an effect as from 1st January 2025. This legislation enforces a global minimum effective tax rate of 15% on companies with consolidated revenues exceeding EUR 750 million. Following external consultation with tax advisers, OCI is not expected to be within the scope of the 15% CIT. However, this new legislation may have an impact on the private equity industry by affecting the performance of the funds, the tax filings and the regulatory complexity. To address those challenges, other participants in the sector may need explore restructuring alternatives.
Countries around the world have also been experiencing a notable increase in the number of extreme weather events that cannot be ignored. The past nine years have been the warmest on record and there have been a record number of other extreme weather events that pose further threats to the global supply chain. The World Meteorological Organization forecasts that the return of El Niño in 2024 is going to create adverse weather conditions, leading to record-high global temperatures and potentially impacting production and distribution, and therefore creating inflation. China currently leads in the production of green technologies, and Western economies are striving to catch up by offering incentives to local businesses, potentially accompanied by increasing tariffs over Chinese technologies. In the event of potential retaliations, a global trade war may spark, creating macro-economic disturbance. It is worth noting that batteries and other non-contaminating fuels depend on critical minerals and other commodities that are scarce, putting additional pressure on geopolitical risks.
While the Risk Committee notes that it cannot control the steps taken by portfolio companies to manage the panoply of potential emerging risks, it will continue to consider emerging risks and observe the possible impact on OCI and the portfolio. The Risk Committee is of the view that the diversification of Oakley’s portfolio and the different stage of the investments is expected to continue to provide resilience and protection to OCI’s NAV.
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There have been a record number of extreme weather events that pose threats to the global supply chain.
Macro-economic and inflation risk
The Risk Committee is focused on the following areas that could potentially impact financial performance and shareholder returns in 2024: increased market volatility, sustained high inflation and interest rates, potential economic downturns and reduced liquidity.
The Board closely monitors macro-economic trends and collaborates closely with Oakley to assess direct and indirect impacts, working together to implement risk mitigation strategies to reduce exposure. The portfolio's robust positioning and the resilience of invested company earnings and revenues allowed it to navigate challenges well in 2023, but vigilance remains crucial for 2024.
The International Monetary Fund forecasts a decline in global inflation rates from 8.8% in 2022 to 6.6% in 2023 and to 4.3% in 2024. While the probability of another significant inflation spike have reduced, in the event that there is another spike central banks may adopt further contractionary monetary policies, impacting consumption and investment and increasing the cost of financing. This could negatively impact valuations by raising the cost of debt and contracting valuation multiples, reducing deal flow and drawing liquidity out of the market. It may also put pressure on profit margins for privately held assets in Oakley's portfolio. To mitigate against these risks, Oakley's risk protocols involve careful monitoring of portfolio companies' leverage and debt structures and active recommendations around interest rate hedging strategies. In anticipation of a more severe liquidity constrained scenario emerging, OCI secured a committed revolving credit facility line of £175 million with an extra £50 million in 2023 which the Risk Committee believes will stand OCI in good stead in 2024. Oakley also worked on securing and maximising its available fund facilities, which the Risk Committee will continue to closely track in 2024 to ensure that the planned trajectory of commitment funding remains appropriate.