Pillar III

Regulatory Disclosures

Pillar II

 

Introduction

Each of RiverRock European Capital Partners LLP (“RRECP”) and RiverRock Securities Limited (“RSL”) is authorised and regulated by the Financial Conduct Authority (the “FCA”). RiverRock European Capital Partners LLP and RiverRock Securities Limited are described herein as “RiverRock”. RiverRock is authorised and regulated by the Financial Conduct Authority (“the FCA”). In the United Kingdom the FCA is responsible for the implementation of the 2006 Capital Requirements Directive of the European Union, which set up the regulatory capital framework for the financial services industry. The framework consists of three pillars:

• Pillar 1 specifies the minimum capital resources that RiverRock is required to carry to cover business risks;
• Pillar 2 sets out the supervisory risk review process to be used by RiverRock and the FCA to determine whether additional capital should be maintained against any other risks not adequately covered under Pillar 1; and
• Pillar 3 specifies the disclosure requirements which RiverRock is required to make of its capital resources, risk exposures and risk management framework.

The FCA regulations for the disclosures required under Pillar 3 are contained in the Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”). Further information on BIPRU can be found on the FCA’s website (www.fca.org.uk). These rules allow the business to exclude disclosures where the information is regarded as immaterial, proprietary or confidential. Disclosures have been made in this document in compliance with BIPRU11 unless that disclosure has been regarded as immaterial, proprietary or confidential. Additional information is available from RiverRock’s Compliance Officer, 11 Pilgrim Street, London, EC4V 6RN.

Business structure

The disclosures contained in the document relate to RiverRock’s business. RRECP and RSL are each privately held and are controlled by their partners and directors respectively, who are active in its business.
RiverRock’s audited financial statements are prepared in accordance with UK GAAP on a consolidated basis; RiverRock European Capital Partners LLP is the parent Firm of RiverRock Securities Limited.

Risk Management

RRECP is an asset manager that primarily invests client assets in privately held illiquid debt securities (via the direct lending fund) and is mainly exposed to operational risk; however, there is additional exposure both to business risk and credit risk. All of these exposures are regarded as typical for a business engaged in the activity of asset management. RSL is a matched principle broker dealer and advisory Firm. It does bare operational, market and credit risk.

RiverRock’s Risk Manager and Compliance Officer, in conjunction with its partners or directors (as applicable), monitor and manage any risk exposures of the business with input from RiverRock’s various business groups. In assessing the risk appetite of the business, consideration has been given to identifying the material risks facing RiverRock’s operations.

These include risks at both the client level and at the entity level taking the form of loss of revenue, loss of assets or higher costs. These risks are detailed in RiverRock’s Internal Capital Adequacy Assessment Process (“ICAAP”) and are reviewed by the Board on a regular basis. Two specific factors have been considered in defining the risk appetite: firstly, the likelihood of occurrence of an event, and secondly, the impact level of such an event. Further information on RiverRock’s risk exposures is set out below:

Credit Risk. As an asset management firm, RRECP is subject to credit risk. RRECP receives investment management fees on a quarterly basis from its direct lending fund. These fees are computed based on the value of each underlying investor’s holdings in the commingled fund. Investment management fees for RRECP’s commingled fund shall be paid within six business days of each quarter end after an invoice is provided. As the commingled fund operates under an almost “long only” investment approach with little or use of leverage, margin or derivative products, there is minimal credit risk associated with the fees. RRECP’s free cash flow is placed on deposit each month. Deposits are normally split between financial institutions depending on available interest rates. Most of the deposits are with its main corporate banking relationship. Depending on amounts involved, other banks could also be used to manage liquidity of the business. The eligible banks are each approved by the Board. The credit rating and financial strength of each bank is subject to an annual re-appraisal. Senior management also monitors certain credit ratings on a monthly basis. RRECP does not utilise any risk mitigation techniques (i.e. credit default swaps) to minimise its financial exposure to bank deposits.

RiverRock European Capital Partners LLP and RiverRock Securities Limited are authorised and regulated by the Financial Conduct Authority.

Stewardship full disclosure

Under Rule 2.2.3R of the FCA’s Conduct of Business Sourcebook, RiverRock Group (“Group”) is required to disclose whether or not it commits to the UK Financial Reporting Council’s Stewardship Code (the “Code”). The Code is a voluntary code and sets out a number of principles relating to engagement by investors with UK equity issuers.

The Group pursues a range of strategies combining both advisory, asset management and trading. The Group does not trade UK equities. The Code is therefore relevant to limited aspects of the Group’s activities. While the Group generally supports the objectives that underline the Code, the Group has chosen not to commit to it.

RSL operates in a market that is largely driven by providing credit to counterparties and has an objective of being aware of, and controlling, counterparty exposure against limits set down. RSL has credit policies and procedures in place under its credit management policy and this helps ensure it deals only with counterparties of suitable credit standing. After considering a counterparty’s financial results and other relevant data, all applications for credit lines are submitted to the RSL’s credit committee for formal approval, or rejection. Such lines granted are advised to the counterparty and are reviewed at least on an annual basis. All counterparty positions are monitored regularly against lines granted. RSL can call margin for cover should net exposures covered by netting agreements, exceed the lines granted. RSL has determined that concentration risk can arise through exposure to any one counterparty or counterparty group, from the industry segment those counterparties are involved in, and from geographic region. Management, however, have in place master netting agreements that reduce the credit exposure significantly and through the netting of assets and liabilities in the event of a default.

Market Risk. As an asset management firm, RRECP portfolios are subject to market risk. RRECP’s fees are asset based fees and RRECP’s revenue increases as AUM and investment performance increase and will decrease if AUM and investment performance decrease. RRECP has structured its business so that many costs are variable (i.e. custody costs) and will fall as its assets under management fall. More importantly, RRECP typically keeps base salaries low and remunerates employees through discretionary bonuses. Surplus liquid capital is not at risk until a loss fully offsets RRECP’s profit before remuneration and taxes, less any committed salaries and staff benefits.
RRECP’s core regulatory capital, surplus capital and free cash flow are primarily invested in cash deposits. Cash deposits are not subject to market risk. To mitigate against market risk, RRECP’s Board does not invest capital that is (i) needed to meet core regulatory requirements, or (ii) needed to fund the operations of the business.

RSL’s objective is to be aware, control and minimise this risk. RSL’s business involves acting as a broker and dealer in credit derivatives and it holds positions primarily on a back to back basis with clients and brokers. Open trading positions held by RSL are small and largely result from client facilitation activities. Where open positions exist where RSL is exposed to adverse price movement in the price of the underlying assets in which it trades and holds positions. RSL has a policy to create trading limits that have been set to take into account each asset’s volatility. These limits are monitored on a regular basis against both marked to market movement and position structure.

Liquidity Risk. Liquidity Risk consists of two primary items – funding liquidity risk and market liquidity risk. Funding liquidity risk is the risk that the counterparties who provide RRECP with short- term funding will withdraw or not roll over that funding. Market liquidity risk is the risk of a generalised disruption in asset markets that make normally-liquid assets illiquid.

RRECP has no borrowing and is not dependent on external financing for any aspect of its business. As a result, RRECP is not exposed to funding liquidity risk. RRECP has some limited exposure to market liquidity risk. For example, one of RRECP’s banking counterparties could suffer severe financial distress and elect not to return some of RRECP’s cash deposits. To mitigate this risk, RRECP ensures that deposits are kept with highly rated counterparties.

RSL’s objective is to ensure adequate financial arrangements are in place to prevent this risk occurring. Prudent liquidity risk management requires maintaining sufficient cash, cash equivalent, deposits and adequate bank facilities readily available to fund RSL’s day to day business. Funding levels are reviewed at least annually by the RSL and its parent RRECP and account taken of both business plans and market levels to ensure an appropriate level of uncommitted bank facilities are available to support the business. Due to the nature of the business there are some months when the RSL can be cash flow negative. This is mitigated by monitoring intra-month the liquidity position of the RSL. As the fixed cash commitments are known there is cash maintained in the form of working capital to cover at least three months requirements.

Operational Risk. Operational risk refers to the risk of a direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events. RiverRock’s attempts to mitigate the impact of operational risks by (i) maintaining substantial financial resources,
(ii) aligning the interests of all staff and shareholders with supervision of the operations of the business through remuneration/bonuses, (iii) maintaining key operating procedures, (iv) periodically reviewing the operations of all material business groups, and (v) keeping RiverRock’s business, structure and operational requirements relatively simple.

Concentration Risk. Concentration risk is the risk that exposures to specific sectors or asset concentration could result in losses to RiverRock or its business. RiverRock’s business could suffer (i) from a decline in its investment performance, or (ii) if institutional investors shift their asset allocations to riskier funds, commodities or other types of investments. There is little RiverRock can do to minimise this risk except focusing on keeping its business simple and aligned with clients, and minimising overheads. It also ensures that its private and public equity and direct lending investment activities are diversified by geography and sectors. Hard limits are in place for its commingled lending fund to ensure investment diversification.

Business Risk. Business risk arises from changes in the core structure of the business that would prevent RiverRock from carrying out its business plan and desired strategy. RiverRock is a small, closely held organisation, where senior management also own a significant stake in the business. All material structural changes to its business are subject to discussion by the Executive Committee, at partnership level, and by the Investment Committee if appropriate. The partners and the Committees as appropriate consult before agreeing to any of the following material transactions:
• Before an investment, loan or capital subscription is made;
• Before an investment is made in any RiverRock collective investment scheme;
• Before any material change in RiverRock’s cost structure or base salaries; or
• Before any new business line is open

Interest Rate Risk. A significant part of RiverRock’s core regulatory capital is invested in rolling cash deposits. As a result, RiverRock’s core regulatory capital should be protected in the event of sharp changes in interest rates. RiverRock does not engage in any principal trades or run any trading book exposures that could be subject to interest rate risk. From a corporate perspective (given its cash balances) and assuming no impact on investment performance, RiverRock would expect to benefit from increases in interest rates as its interest income would rise. Such insurance is in place at the Group level.

Insurance Risk. RiverRock maintains fiduciary liability (also referred to as professional indemnity) and criminal liability (also referred to as errors and omissions) insurance policies which are set at a limit which RiverRock considers appropriate for the business of RiverRock and subject to a deductible which RiverRock can reasonably afford to meet if called upon. RiverRock would be exposed to potential losses in the event that an error occurred and its insurer was unable to recover anticipated insurance settlement proceeds. RiverRock attempts to obtain insurance only from well capitalised insurance Firms to minimise the risk of loss arising from insurance risk.

Legal/Regulatory. RiverRock’s business is subject to many regulations in different jurisdictions and currently the pace of change is significant and may affect the business either directly or indirectly by reducing investors’ appetite for products, increasing capital requirements or in some other way.
Regulatory developments are continuously monitored and where there is likely to be an impact, working groups are formed to implement the changes. The General Counsel and the Compliance Officer (assisted by external advisers, where applicable) monitor ongoing regulatory obligations.
Capital Resource Requirements
Pillar 1 requirement is calculated as the higher of:
CPMI firms are subject to the following capital and professional negligence requirements:
Capital = BASE OWN FUNDS (€125K) + FUM REQUIREMENT (0.02% of the amount by which the FUM exceeds €250m)
OR – one quarter of the firm’s relevant fixed expenditure; €412,893, AND
Professional negligence = must cover your professional liability risks by either ADDITIONAL OWN FUNDS (0.01% of the portfolio’s value); OR, AIFMD-Compliant PII cover
In the opinion of the Board, the higher of these three is likely to be the Fixed Overheads Requirement and therefore the other three measures are deemed immaterial to the Firm.
RiverRock has calculated its capital needs in accordance with the relevant FCA regulations. RiverRock has a surplus of regulatory capital over its Pillar 1 capital on a consolidated basis.