Risk Management Policy
BridgeFort faces a number of risks which management needs to address. The bulk of the risks faced are as a result of the uncertain political and economic environment prevailing in the country. BridgeFort is determined to assess accurately these and other risks with a view to mitigating their effect on shareholder value. The risk management policy seeks to effectively identify, measure, monitor and control risk exposures consistent with the BridgeFort Board’s risk appetite. It also sets out desired risk management culture and governance processes in order to maximise the company’s value.
Risk management encapsulates organisational purpose, governance, leadership, strategy, objectives and operations hence is managed at all levels of the Company with the BridgeFort Board providing overall oversight. This Policy must be read and applied in conjunction with all Bridgefort policies and procedures as well as applicable laws and regulations.
3. RISK APPETITE
Bridgefort will not take a single and fixed approach to investment and acquisitions but rather a varied and diverse approach based on a case-by-case assessment which main thrust would be to ensure unlocking shareholder value and variegation of share classes bearing in mind the turnaround and success of underlying assets within the various share classes. Through this approach, BridgeFort considers all potential business options as a precursor to the selection of the one most likely to result in successful delivery, while also providing an acceptable level of reward and value for money. Unlike other approaches, this approach allows flexibility and agility in doing business. A more aggressive approach may be applied even to distressed companies after careful board consideration. BridgeFort accepts risk as part of value creation and preservation, and it expects return commensurate with the level of risk. BridgeFort will consider risk quantitatively, with categories of high, moderate, or low. It will also take a qualitative approach, reflecting and balancing goals for growth, return and risk.
4. RISK TOLERANCE
Risk tolerance relates to acceptable levels of variations from set objectives and intended outcomes by the BridgeFort Board. These are set by the BridgeFort Board and cascaded to all classes of shares and their respective underlying assets. Operating within risk tolerances provides the BridgeFort Board and shareholders greater assurance that the BridgeFort remains within its risk appetite and, in turn, provides a higher degree of comfort that it achieves its objectives.
5. RISK MANAGEMENT CULTURE
Risk culture is the shared values, attitudes, competencies, and behaviours throughout the organisation that shape and influence governance practices and risk decisions. Risk culture pertains to BridgeFort’s risk approach and is critical to sound risk management governance.
The following are the risks identified for BridgeFort and their respective mitigants. These risks are assessed from the standpoint of the shareholders of BridgeFort in their various classes. From time to time, provisions of this framework shall be updated to align same with changes in the operating, regulatory and statutory environment.
6.1 ECONOMIC RISK
BridgeFort shall hold the bulk of its assets in Zimbabwe which has faced enormous economic decline over the past two decades. This uncertainty can affect the performance of investee companies or assets and the market for disposals of assets.
BridgeFort shall mitigate this risk through careful selection and prior due diligence of any investments. In this regard BridgeFort shall favour investments with an export profile, products in categories which are less affected by economic volatility, well run and profitable businesses, those that are in dominant positions, businesses that may benefit from vertical integration and or businesses that stand to grow market share and as a result value in the face of declining economic conditions.
6.2 FINANCIAL RISK / SHARE CLASS CONTAGION
Another major risk facing BridgeFort shareholders is the contamination of BridgeFort with unfunded obligations which shall affect all classes of shareholders. Varying operating models within underlying assets in classes of shares mean that the structure has to hold clearly in such a manner that each class of shares does not affect the other. It is BridgeFort’s intention that all gains/losses or expenses arising in respect of a particular Share Class are borne separately by that Share Class.
BridgeFort has mitigated risk by building into its articles of association that company borrowings and guarantees may not exceed USD100,000 or the local currency equivalent unless the additional amount by which it is exceeded may be converted, at the sole discretion of BridgeFort, into shares of the specific class for the benefit of which the borrowing was done or an underlying asset. The founding documents also insulate the classes of shares specifically to only affect the underlying assets which are part of the portfolio belonging to that class.
The benefits, preferences or any special rights, conditions or obligations of a specific class cannot be transferred or assigned to any other class of shares and shall only affect and be restricted to that specific class of shares unless otherwise approved by shareholders of that class. This assists in further insulating classes of shares.
6.3 LIQUIDITY RISK
Liquidity risk is another risk faced by shareholders which is the risk investee companies individually, or collectively, fail to cover their allocated costs of BridgeFort, thereby creating an unfunded obligation in respect of the costs of BridgeFort.
This risk is again, managed in the articles of association, by giving the right to BridgeFort to allot further shares of the specific class, to which the defaulting investee company belongs, to the market, the proceeds of which shall be used to fund their specific or general BridgeFort costs.
6.4 EXCHANGE RATE RISK
The risk of movements in the exchange rate can affect BridgeFort shareholders in that any assets they hold as part of their portfolio may decline in value. BridgeFort may invest from time to time in assets denominated in local currency. Changes in exchange rates between local currency and US Dollars the value of which is generally stable over time will cause the value of the asset expressed in the US Dollars to fall or rise. BridgeFort may utilise instruments including derivatives for hedging purposes to manage this currency risk.
BridgeFort shall manage this risk by favouring investments in companies which are likely to largely mitigate these risks, and additionally shall not hold significant net Zimbabwe Dollar balances which may devalue. We will further manage transaction exchange rate risk by way of hedging strategies, mostly with locking future exchange rates per transaction wherever possible, thus leaving the Company hedged against volatility in the exchange rate market during a transaction execution.
However it may not always be practically possible to completely mitigate currency risk in respect of a class of shares or specific assets within the class of shares.
6.5 TAX CONSIDERATIONS RISK
BridgeFort may be subject to withholding or other taxes on income and/or gains arising from its various underlying assets in the various classes of shares. Where the Company invests in securities that are not subject to withholding or other taxes at the time of acquisition, there can be no assurance that tax may not be imposed in the future as a result of any change in applicable laws, treaties, rules or regulations or the interpretation thereof. The Company may not be able to recover such tax and so any such change could have an adverse effect on the net asset value of the Shares. The tax information provided initially is based, to the best knowledge of the Company, upon tax law and practice as at the date of publication. Tax legislation, the tax status of the Company, the taxation of shareholders and any tax reliefs, and the consequences of such tax status and tax reliefs, may change from time to time. Any change in the taxation legislation could affect the tax status of the Company, as well as the value of the investments and in turn affect the BridgeFort’s ability to achieve its investment objective and/or alter the post-tax returns to shareholders.
6.6 GLOBAL FINANCIAL MARKET CRISIS AND GOVERNMENTAL INTERVENTION
Global financial markets have sometimes undergone pervasive and fundamental disruption and suffered significant instability which has led to governmental intervention. Regulators in many jurisdictions have implemented or proposed a number of emergency regulatory measures. Government and regulatory interventions have sometimes been unclear in scope and application, resulting in confusion and uncertainty which in itself has been detrimental to the efficient functioning of financial markets. It is impossible to predict what additional interim or permanent governmental restrictions may be imposed on the markets and/or the effect of such restrictions on the BridgeFort management’s ability to implement the Company’s investment objective. Management and the BridgeFort Board cannot predict how long the financial markets will continue to be affected by these events and cannot predict the effects of these – or similar events in the future. Instability in the global financial markets or government intervention may increase the volatility and BridgeFort’s efforts will be directed towards being proactive to these changes rather than reactionary.
6.7 HEADLINE/ REPUTATIONAL MARKET RISK
Headline risk is the risk that stories in the media will hurt a company’s business. With the increasing use of social media to market businesses and to build a reputation of its services or goods on online platforms, it increases the risk of association with businesses’ online footprint. The various underlying assets in each class of shares stand to affect the share price of a class it belongs to, and other classes with any online scandals or missteps.
Bad news can lead to a market backlash against a specific company or an entire sector, often both. BridgeFort shall adopt a hands-on approach including standard SOPs and social media and client engagement control systems, to ensure that backlash towards the specific class to which the negative media/response actually relates to, along with any effect on other classes of shares, is minimised or removed altogether.
6.8 SOVEREIGN/ LEGACY DEBT
Due to the nature of the conversion of MedTech to BridgeFort Capital, there is the risk of legacy or prior debt that was under MedTech being transferred to the new classes of shares and affecting the underlying assets therein. In order to ensure that the same does not happen, management has insulated the rest of the classes of shares by addressing the same in the altered founding documents and stipulating that any liabilities (legacy debt) which are identified in the future, relating to the period prior to the conversion to BridgeFort be attributable to the holders of the Class A Shares who will be the previous MedTech Shareholders.
6.9 CONTINUITY RISK
There is risk associated with small capital private companies that centre their existence around one person whose skill set is specific and integral to the running of the underlying business. It thus presents a problem for management and the BridgeFort Board, as well as an impact to shareholders, particularly taking into account the lack of skills and unavailability of enhanced skill sets within Zimbabwe, either to diversify and delegate or even to replace such entity heads.
6.10 REGULATORY RISK
There always remains the risk that a change in laws and regulations of a regulatory body will have material impacts on a business, industry, or market, and on how an investor can invest. BridgeFort’s risk is particularly raised in this instance because various underlying assets have different regulatory controls and laws applicable to their way of doing business. It is management’s highest priority to operate within the confines of these laws to the best interest of the shareholders and investors. Accordingly, in order to mitigate regulatory and compliance risk, there shall be a dedicated team that deals with compliance to set laws and regulations.
7. GENERAL MITIGATION OF RISK
As highlighted above, risk is a basic ingredient in the recipe for all investments. However, the level of risk can and will be minimised or eradicated. Risks specific to operations (credit/business risks) are better managed and diversified away, while systematic risks (inflation, exchange rates) cannot be fully eliminated. Various tools shall be used generally to govern and avert risk, including diversification within each class with different economic strengths. When the underlying assets within each class are not 100% correlated, it lowers the overall volatility and risk of the portfolio.
The level of diversification within each class shall relate to the BridgeFort Board’s risk tolerance, investment time horizon, and investment objectives of each class. Understanding, setting and adjusting BridgeFort’s risk tolerance and investment objectives is a major part of its risk management.
8. MANAGEMENT ROLES AND RESPONSIBILITIES IN MANAGING AND CONTROLLING RISK
Management is responsible for implementing the corporate vision, strategy and business model approved by the BridgeFort Board. To this end, management shall ensure adequate resources are allocated to effectively manage risk. They shall guarantee effective communication and reporting arrangements are in place to support good risk management practices. It shall ensure that all classes of shares and the underlying asset managers are aware of the requirements of the risk management framework and their specific roles and responsibilities through regular training and risk awareness campaigns. It shall be their prerogative to maintain internal reporting mechanisms, including reports to be sent to the Board, are developed to provide accurate and timely information relevant to the effective management of risks.
9. BOARD RISK COMMITTEE
The committee’s responsibility is to scrutinise and proffer recommendations on the management of BridgeFort related risks and compliance issues to assist the BridgeFort Board in its oversight role. The committee shall preside over enterprise-wide risk management structures and governance processes, it sets the organisation’s risk appetite and risk tolerance levels. It shall further approve policies relating to risk management governance, risk management practices and risk control infrastructure for the organisation as a whole. The committee will constantly review business continuity management and a disaster recovery plan for adequacy and effectiveness. It is the committee’s prerogative to manage the information technology infrastructure to ensure it is sufficiently robust to provide support to risk governance processes.
10. RISK MANAGEMENT FUNCTION OF THE INVESTMENT AND RISK COMMITTEE
The risk management function is responsible for ensuring that effective processes are in place for identifying current and emerging risks as well as developing risk assessment and measurement systems. Its prerogative shall be to establish policies, practices and other control mechanisms to manage risks. Its function shall be to review policies and procedures to align them with developments in the regulatory and operating environment. The compliance function assesses, on an-ongoing basis, the extent to which all share classes are complying with established policies, procedures, applicable laws, regulations, and guidelines. On a regular basis, the compliance function apprises the BridgeFort Board and management on all material compliance issues affecting the various entities. These include material breaches of regulations and procedures and any changes in regulations requiring implementation. Further and equally important, the compliance function inculcates a corporate culture of compliance through training and other internal communication channels.
11. AUDIT FUNCTION
BridgeFort’s internal and external audit partners shall provide independent assurance to the Board, Management and other stakeholders on the quality and effectiveness of its internal controls. In the context of risk management, the audit function periodically assesses the effectiveness of the risk management framework and practices with the view of proffering appropriate remedial action.
12. THE RISK MANAGEMENT PROCESS
The Risk Management Process includes identification, measuring, controlling, monitoring and mitigation.
12.1 Risk Identification
Almost every product and service offered within a potential investee company has a unique risk profile composed of multiple risks which must be identified. For example, FMCG investees are affected by various types of risks such as credit risk, exchange rate risk, governmental policy risk and operational risk. Risk identification should be a continuing process and risk should be understood at both the transaction and ongoing management levels.
12.2 Risk Measurement
Once the risks associated with a particular activity have been identified, the next step is to measure the significance of each risk. Each risk should be viewed in terms of its three dimensions: size, duration and probability of adverse occurrences. Accurate and timely measurement of risk is essential for effective risk management.
12.3 Risk Monitoring:
This activity includes developing reporting systems that monitor the specific risks and control items that had been identified and also adverse changes in the risk profiles of significant products, services and service delivery channels. Accurately identifying and measuring risks is important in this process.
12.4 Risk Control
Once risks have been identified and measured for significance, a risk management strategy shall be developed to address each risk or at least minimize its adverse consequences. It is a primary management function to balance expected rewards against risks and the expenses associated with controlling risks. Once risk limits are established, they are communicated through policies and procedures that define responsibility and authority.
Overall, the BridgeFort Board and management shall continue to keep themselves aware of diverse risks inherent in the Company’s business operating model. BridgeFort shall manage risks in a holistic manner to support risk-based decision making across the organisation. This involves merging perspectives and processes highlighted above, of business operations with risks and uncertainties identified as the organisation continues to grow and expand.