Risk management system
At SBG, the Risk Management Office spearheads Group-wide risk management activities cooperating with each Group company and department. The office is supervised by the Chief Risk Officer (CRO), who is appointed by the Board of Directors with responsibility for Group-wide risk management.
SBG established the Risk Management Policy to ensure a Group-wide understanding of the purpose of risk management and to clarify the basic roles of officers, employees, and risk managers. This policy applies to all officers and employees of SBG and the Group companies to encourage their active involvement in risk management activities. In accordance with SBG’s Risk Management Regulations and the Group Company Management Regulations, which are set under the Risk Management Policy, SBG and the Group companies appoint risk managers. The risk managers are responsible for comprehensively identifying financial and non-financial risks that might arise during business activities and monitoring the progress and status of responses to such risks.
The Risk Management Office ensures the effectiveness of Group-wide risk management by receiving reports on important matters from the risk managers and confirming compliance with the regulations. The policy and regulations are periodically reviewed and approved by the Board of Directors of SBG and other bodies. The Risk Management Office quarterly reports identified risks that are material to the Group and their countermeasures to the Board of Directors and the Group Risk and Compliance Committee (GRCC), respectively. Accordingly, both governance bodies supervise the Risk Management Office. The GRCC consists of Board Directors and Corporate Officers of SBG and provides oversight of the risk management and ethics and compliance programs of the Company.
Risk management initiatives
The Risk Management Office works to strengthen risk management activities by identifying and addressing risks, with the aim of mitigating factors that adversely affect the Group’s sustainable growth.
The Risk Management Office is pursuing the following initiatives to gain a comprehensive understanding of financial and non-financial risks facing the entire Group.
Prior confirmation of important agenda items
When important matters are to be resolved by SBG’s Board of Directors, the Investment Committee, and other bodies, the Risk Management Office confirms the agenda items in advance and consults with the relevant departments, if necessary. It also ensures that risk-related information that needs to be considered is reflected in the agenda.
Portfolio risk analysis
The Risk Management Office performs risk analysis over the entire Group’s investment portfolio from various perspectives. For example, the Risk Management Office monitors the impacts on SBG’s financial ratios that are caused by changes in the external environment such as economic and monetary policies and other political conditions. The concentration of investments in specific countries, regions, and sectors is also monitored continuously.
Gathering risk-related information from each Group company and department of SBG
The Risk Management Office gathers information on various risks from the major Group companies and each department of SBG. When the risks materialize, the relevant Group companies and departments of SBG escalate the issues to the Risk Management Office in a timely manner.
Responding to risks
Based on the information gathered through the above initiatives, the Risk Management Office identifies material risks at the Group level by analyzing and assessing the impact and likelihood of each risk scenario. Material risks are reported to and discussed by the Board of Directors and the GRCC. Based on the results of those discussions, the Risk Management Office considers countermeasures and monitors the situation to confirm the effectiveness of those countermeasures.
Message from Our Chief Risk Officer (CRO)
Q. Among the various risks that have materialized over the past year, which ones do you perceive as particularly material? Also, how have you responded to these risks?
As an investment firm focused primarily on AI-related companies, we are highly sensitive to the economic environment and the stock market. For example, the NASDAQ Composite Index, which consists mainly of high-tech companies, fell nearly 15% in the year ended March 31, 2023. Meanwhile, the total amount of investments made in the venture capital market peaked at the end of 2021 and has shrunk significantly since then. Under such market conditions, the value of public portfolio companies has declined, while the value of private portfolio companies has also decreased significantly due in part to weak business performance. In addition, we are greatly affected by exchange rate fluctuations because our investment business is centered on overseas companies. In fiscal 2022, the U.S. dollar-yen exchange rate fluctuated rapidly. If the yen was to appreciate sharply, our equity value of holdings would be adversely affected.
In this environment, the Risk Management Office continues working with the Finance departments to analyze the impact on LTV and cash position by conducting stress tests based on the assumption of major market events, such as the 2008 financial crisis, and reports the results of such analyses to the Board of Directors and the management team on a quarterly basis.
Although we experienced a sharp markdown in our portfolio companies in fiscal 2022, we successfully maintained LTV and cash position, our key financial indicators, at favorable levels. We believe this is the result of our timely shift to a more defensive policy, under which we have made investments and sold assets in light of changing market conditions.
We are also keeping a close watch on the recent tightening of regulations amid escalating tensions between the U.S. and China. In particular, we expect U.S. regulations on investments and exports of semiconductors and other high-tech products to become stricter in the future for the purpose of national security. Given concerns about possible adverse effects on our investment activities and the businesses of our portfolio companies, we are working with specialized functional teams in Japan and overseas to grasp the situation.
Q. A lot of attention is being paid to the impact of unstable market conditions on the portfolio companies of SVF. How specifically do you manage the risks of individual investments?
SVF conducts research into economic, market, and industry trends to determine the portfolio companies to be closely monitored. Furthermore, SVF performs other procedures such as participating in board meetings of portfolio companies to understand their management policies and issues and analyzing their earnings forecasts and financial plans. The results are reported to SVF management for discussion on how to respond.
SVF is usually a minority shareholder with no direct control over the day-to-day management of the portfolio companies. However, in addition to voting rights on the board of directors at many portfolio companies, we have certain other rights, such as the right to veto dilutive financing, additional borrowing, or the sale of subsidiaries, and we strive to exercise these rights to the fullest extent possible.
Given the recent deterioration in the financing environment for our portfolio companies, they are encouraged to limit new investments for business expansion and to secure cash reserves to reduce their reliance on future financing. As of March 31, 2023, 94%* of SVF’s private portfolio companies had more than 12 months of cash runway, indicating that they are prepared for an immediate crisis.
The risk management of individual investments is the primary responsibility of SVF’s investment risk management team. However, information on matters identified as material risks is regularly shared with SBG’s Risk Management Office and, if necessary, reported to SBG’s Board of Directors.
Though this has been a volatile year, we have strengthened cooperation within SBG and the Group on a daily basis and aim to manage risks flexibly in response to any changes in the environment.
Based on the fair value of private portfolio companies in the SVF1, SVF2, and LatAm Funds with 12+ months runway compared to total unrealized fair value of private investments. Excludes portfolio companies where cash runway data is unavailable.