01 May 2011

Global Risk Economy: Follow the Money...

Operational Risk in the global economy is migrating to places that 10 years ago would not have been easily forecasted. New countries, financial institutions and software technologies have changed the playing field for risk management executives.

Why is this happening? One example is the movement of employment to more emerging markets where corporate tax rates are lower and the supply of talented workers with specific skill sets is prevalent. The simple movement of people and systems to those new countries creates new found risks that may not have been as pervasive in the past for the institution.

Another example is the evolution of new computing platform paradigms such as the emergence of "The Cloud" or "Infrastructure-as-a-Service". This outsourced IT model not only provides economy of scale in terms of just in time computing power but also the more economical licensing models for primary office automation Apps such as word processing, spreadsheets, presentations and simple databases.

Operational Risk within the confines of the global workplace will continue to follow where these people and the systems are operating from. Along with this migration of responsibilities of vital corporate processes to other cultures and countries comes the risks associated with potential lack of safeguards both legally and to the physical protection of key corporate assets.

In the United States, The "ABC's of the International Economy" explains why there are 22 million employees now working for US-based corporations outside the country. One may have heard the phrase "Follow The Money" in several contexts in the past. Whether it was Watergate investigations in the 70's or the new war on terror the tracking of where money flows can be a real indicator of where operational risk managers need to keep their radar focused and on high alert. Keep your eye on firms like The Carlyle Group:

On the face of it, Carlyle has started fooling around again. It completed the most deals and spent the most money of any private-equity firm in 2010 (see table). In January it bought AlpInvest, a private-equity fund of funds that manages €32.3 billion ($43.3 billion) on behalf of two Dutch pension schemes. The deal will close in the next several weeks, making Carlyle one of the world’s two largest private-equity firms, with $150 billion under management—neck-and-neck with the Blackstone Group, and more than twice as big as Kohlberg Kravis & Roberts (KKR).

Size certainly matters for Carlyle, since the firm is expected to go public soon. The more assets and sources of cashflow it has, the more attractive it will be to potential shareholders. But this is not a return to the promiscuity of the boom. Carlyle likes to do things differently. It eschewed the obvious buy-out hubs of New York and London and has its headquarters in Washington, DC, a few blocks from the White House. And whereas most big firms concentrated on billion-dollar “mega-funds” before the crisis and have only recently begun raising smaller, more focused funds, Carlyle has been doing things that way for years. It has 84 active funds, many of which have narrow mandates, like investing in Mexico or energy companies. KKR, in contrast, has around 12 active funds.

Carlyle was one of the first to China and now is headed to sub-Saharan Africa in the face of a evolving political and legal climate. Soon after security is established, the capitalists will arrive and commerce will take on a whole new perspective. Infrastructure will soon follow and the playing field is set for the global economy to engage in the development of new markets and new opportunities.

About the DIFC
The Dubai International Financial Centre (DIFC) is an onshore finance and business hub connecting the Middle East, Africa and South Asia region (MEASA) and the rest of the world.

Since its launch in 2004, the DIFC has established a current client base of 780 firms which have registered at the Centre, including 16 of the world’s largest 20 banking institutions. Thousands of employees operate in an open environment complemented by international regulations, laws and standards. The DIFC offers its member institutions incentives such as 100 per cent foreign ownership, zero percent tax rate on income and profits and no restriction on capital convertibility or profit repatriation. In addition, the DIFC’s clients benefit from modern infrastructure, operational support services and business continuity facilities.

Operational Risk Management in the next ten years will take on a whole new meaning than it does today. Fueled by the likes of places such as the DIFC the risks associated with people, processes, systems and external events will become exponential.

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