Translating Risk for Social Impact

“Successful private equity needs macro-economic and micro-economic factors. These include political stability, sophisticated capital markets, corporate governance, strong entrepreneurial structure, and proper benchmarking. Other factors include fragmented markets, low competition, and comparability of funds.”

— Markus Ableitinger, Director of Capital Dynamics

(Originally written: 10.12.2018)

Businesses did not begin to champion social impact or corporate social responsibility until they were truly faced with understanding counter risk to global operations – the effects of environmental, social, and governance in networked operations and stakeholder management. They saw that portfolios with “impact” or ESG indicators have outperformed those during the 2008 downturn, and found impact investing as a method to mitigate short-term risk for long-term value creation. Essentially then, risk tolerance becomes to what extent do we want our dollars to be philanthropic and the type of risk to a portfolio, climate, technology, etc., are equivalent to the opportunity of innovation in the portfolio companies.

However, there is substantial lack of language of risk mitigation in impact investments or studies of political determinants of venture capital investments. Yet, VCs include political stability among the important determinants of receiving VC funding.

The supply of VC comes from the share of risk capital provided by private investors. Along this line, the macro factors are mainly general economy, technological opportunities, entrepreneurial environment, and political risk.

Markus Ableitinger, Director of Capital Dynamics says, “successful private equity needs macro-economic and micro-economic factors. These include political stability, sophisticated capital markets, corporate governance, strong entrepreneurial structure, and proper benchmarking. Other factors include fragmented markets, low competition, and comparability of funds.”

Moreover, venture capitalists and investors are growing in Singapore taking advantage of the country’s political stability, highly educated workforce and strategic location. Despite the fact that micro, macro and even legal determinants of VC financing have more or less been analyzed; changes in political stability of countries have received little attention.

VC investment intensity is the total value of stocks traded, the significance of IPO in a fixed effects model, GDP growth (GDP) as well as inflation, labor market rigidities, and some of the political risk variables – investment profile, socioeconomic conditions, corruption and other determinants.

Given the increasing frequency and intensity of political/economic crises, a more systematic method of measuring political risk and evaluating its impact on market prices is required for emerging markets. Businesses can successfully mitigate and manage macro-political risk in emerging markets with targeted preventive investments into portfolio companies.

For instance, with Khashoggi, the United States is about to sanction specific entities and France and others could also back sanctions, which would affect countries with commercial deals with Saudi Arabia and have a certain number of days to wind down the activities depending on the products being sanctioned – that would translate into – from relying exclusively on export products to opening up domestic companies and technologies less variable to political activities.

For VCs, where we’re concerned with risk in maintaining profits, sustaining economic growth and protecting investments from market fluctuations, we have to manage threats in regulatory relationships, overall legal environment, and geopolitics critical to smooth operations.

Today’s environment requires innovation by companies by both sensing and understanding these risks and in adapting risk management to include networked-based models of information sharing. Each area of risk management is becoming a strategic value for an enterprise, and must be mainstreamed into the entire organization’s value proposition – beyond philanthropy and the CSR paradigm.When portfolio companies are scanned for threat and vulnerability for types of risk, we’re also able to measurably predict the role of companies with business processes that can conduct mitigation potentially as a supply chain partner. We can effectively then incentivize companies for mergers and acquisition, monitor its capacity for IPOs, and others – by geopolitical prediction.