What do you believe the key risks are for the firms you support?
2024 is poised to be a year of both heightened risks and opportunities. We face intense geopolitical uncertainty, diverging economic developments and evolving regulatory imperatives. The key risks many of our clients are dealing with and which we are continuously monitoring revolve around navigating complexity, embracing uncertainty, and emphasizing the importance of vigilance and accountability. Key themes in 2024 and beyond will include:
- An Increasingly Complex Cyber Threat Landscape
- Public Market and Private Market Economies Continuing to Diverge
- Interest Rates May Have Peaked, but the Wave of Distress, Restructurings and Bankruptcies is Just Beginning
- Lower Equity Risk Premium Likely as Equity Market Risk Subsides, Interest Rate Certainty Increases, but Overall Cost of Capital remains High
- AI Will Be Huge and So Will the Compliance Risks
- Increased C-Suite Accountability for Governance and Supervisory Oversight
Risk is a constant factor, and its origins are often multi-faceted depending on the macroeconomic and political climate.
How does Kroll approach the challenge of mitigating risk for your financial advisory clients?
For our financial advisory business, including in Germany, a large share of the transactions we work on involve complex cross-border deals. To support our clients, we operate with global industry groups of experts with deep domain experience to drive superior outcomes and actively lead all facets of our engagements through completion. This approach ensures the most insightful strategy and enables us to deliver bespoke transaction advice for actionable options.
Which areas should firms particularly focus on in relation to best practice and standard setting from a financial advisory perspective?
Boards of directors are subject to increased external scrutiny. Corporate M&A, raising capital or buying out a large shareholder will result in questions about the effect of such actions on existing shareholders. An independent fairness analysis and opinion supports boards in assessing these often complex and time critical transactions and ultimately their fairness to shareholders.
Private equity sponsors increasingly find themselves on both sides of a deal involving one or more investment funds under their management. GP-led secondary recapitalizations continue to gain momentum in Europe and have become an important path to liquidity as an alternative to traditional M&A or IPOs. GP-led secondary recaps build value, crystallize value for investors; and provide an option for existing LPs to achieve full or partial liquidity on their fund interests and to actively manage their portfolio.
While it has become customary for GPs to obtain fairness opinions in GP-led secondary recaps in the U.S., based on anecdotal evidence provided by our clients, we estimate that fairness opinions are still only obtained in approximately 50% of GP-led secondary transactions in Europe.
How does Kroll leverage its expertise and technology to help its clients navigate these and other risks?
Technology is arguably the nucleus of both opportunity and risk. Artificial intelligence (AI) and/or machine learning have the power to propel businesses forward but could also be used to attack or undermine them.
As such AI can bring amplified compliance risks for senior management. In recent years, risks originating from or becoming amplified by digital chatter across the open, deep and dark web have reached an unprecedented scale. We leverage our proprietary technology, like Resolver, a Kroll Business, to provide a robust defense against existing and emerging threats to organizations. Resolver’s AI technology has been trained to discover and track the risk signals embedded within digital chatter and is combined with a human review layer that creates signal from the noise so you can take action and mitigate impact quickly.
What are the trends that firms need to be aware of in the context of risk management and corporate security?
The increasingly complex cyber threat landscape arguably tops the list here. Bad actors seeking to overwhelm corporate defenses are likely to continue to exploit Zero-Day vulnerabilities (where attackers have discovered an unknown vulnerability to the target firm) and One-Day vulnerabilities (where a mitigation is available but hasn’t been applied yet).
The proliferation of remote working also creates a potential soft target for criminals, and greater use of cloud-based solutions and associated data privacy requirements mean that firms have no option but to develop robust cybersecurity strategies.
The regulatory burden linked to AI will undeniably be a test for firms too. The European Union’s preliminary agreement on AI regulation and the SEC’s initial rule proposals are just the first ripples of a regulatory tidal wave that compliance leaders will need to overcome.
Essentially, the pressure to introduce AI for positive reasons might be more than counterweighted by the required control and oversight of such technology by global regulators.
