The types of financial risks that the Industrivärden Group encounters in its business consist primarily of equities risk and – to a limited extent – other financial risks in the form of e.g., interest rate risk and liquidity risk.
Equities risk pertains mainly to share price risk, which is the entirely dominant risk in Industrivärden’s operations. By share price risk is meant the risk of a decline in value caused by changes in prices in the stock market. Industrivärden’s active ownership should reduce the relative equities risk in the portfolio companies and thus also in Industrivärden’s portfolio. Moreover, the active ownership role provides good insight into the portfolio companies’ operations, external operating environment and continuing development. Having a diversification of equities in the portfolio reduces volatility and contributes to a more stable return over time. Share price risk can be illustrated as such that a 1% change in the price of all listed shareholdings in Industrivärden’s equities portfolio as per December 31, 2017, would have affected the market value by +/– SEK 1,100 M.
Interest rate risk
Interest rate risk is the risk that the value of a financial instrument will vary due to changes in market interest rates. The financial instruments that are exposed to interest rate risk consist of loans with variable interest rates. Swap agreements may be used to limit interest expenses and to adjust maturities. Industrivärden’s interest rate risk and its effect on earnings are judged to be low. At year-end 2017, two interest rate swap agreements were in effect under which a variable interest rate was swapped against a fixed interest rate. The agreements pertain to borrowings totaling SEK 1,250 M with a term of 9–20 months. At year-end 2017 the market value of the swap agreements was SEK –12 M. A parallel shift up or down in the interest rate curve by 1 percentage point would affect income after financial items in 2017 by approximately +/– SEK 50 M.
Liquidity risk and refinancing risk
Liquidity risk is the risk of encountering difficulties in accessing liquid assets in order to meet obligations associated with financial instruments. In accordance with Industrivärden’s finance policy, at any given time the Group has a minimum of SEK 2 billion in committed credit facilities at its disposal. Refinancing risk is the risk of a company being unable to obtain financing or that financing can only be obtained at a considerably higher cost. In the aim of minimizing refinancing risk, loan maturities are distributed evenly over time to lower the likelihood of a large portion of loans being refinanced at the same date. Industrivärden’s liquidity risk and refinancing risk are judged to be low. With an equity ratio of 88% (86%) and an A-rating (S&P), Industrivärden has considerable financial flexibility.
Currency risk is the risk that the value of assets and liabili- ties will vary due to changes in exchange rates. Industrivärden’s currency risk is mainly coupled to the currency exposures of its respective portfolio companies.
Counterparty risk is the risk of a party in a transaction with a financial instrument not being able to meet its obligations and thereby causing loss to the other party. Internal rules set by Industrivärden prescribe that approved counterparties have high credit ratings with respect to investments, derivative transactions, etc., which is why counterparty risk is considered to be low. Where applicable, ISDA master agreements are used.
Operational risk is the risk of incurring a loss due to defects in internal routines and systems. Industrivärden’s risk management rests on a foundation of internally adopted guidelines and rules, and of policies adopted by the Board of Directors. Important rules include investment rules, the risk policy, the insider policy and the finance policy. Matters pertaining to confidentiality and information security are of major importance for Industrivärden and are regulated by internal guidelines.
Internal control over financial reporting
Against the background of the share price risk described above, the most important control process in Industrivärden’s business consists of the continuous monitoring of value exposure in the equities portfolio. Industrivärden’s internal control is therefore primarily focused on ensuring the reliability of valuations of outstanding equity and derivative positions and of the reporting of purchases and sales of stocks and other securities.
According to the Swedish Companies Act, the Board is responsible for internal control. The instructions regulating the division of duties between the Board and the CEO lay out investment rules for equities and derivative instruments as well as a finance policy. Decision-making channels, authority and responsibility are defined by a set of investment rules and by a risk policy. Industrivärden has a specially appointed investment committee that makes regular decisions on investment matters within the framework of the CEO’s mandate. Other processes with a bearing on the financial reporting are regulated by Industrivärden’s insider rules, the information policy and the confidentiality policy. Industrivärden’s greatest risk consists of value exposure in the equities portfolio. The predominant risk in work processes pertains to potential errors in the accounting and reporting of equity transactions. Industrivärden continuously assesses the risks in the handling of equity transactions, which are discussed with the auditor and affect the structure of internal risk control.
Control activities pertaining to the equities portfolio include, among other things, approval of all business transactions, daily registration in internal systems, follow-up of equity transactions to ensure that they are in accordance with decisions made by the Investment Committee, and checks to make sure that the value of purchases and sales of stocks and of underlying stocks in derivative transactions is within the scope of established exposure limits. The Investment Committee, which is made up of the Executive Management together with representatives from the investment and analysis organization, continuously follows up investment decisions that have been made and checks to ensure that they have been executed correctly. Minutes are recorded of Investment Committee meetings.