The European Union’s Capital Requirements Directives implement the Basel Capital Accords and provide for a regulatory capital framework across Europe for the financial services industry. Permira Debt Managers Limited (“PDML”) must comply with the requirements of the Capital Requirements Directive and the rules and regulations of the UK Financial Conduct Authority (“FCA”).
The principles of the new framework are set out in three “pillars”:
- Pillar 1 sets out the minimum capital requirements that PDML is required to meet;
- Pillar 2 requires PDML, and the FCA, to take a view on whether additional capital should be held against certain risks not adequately covered by Pillar 1; and
- Pillar 3 requires PDML to publish certain details of its risks, capital and risk assessment process.
This disclosure is made in accordance with PDML’s Pillar 3 Disclosure policy which has been approved by the Board of PDML.
PDML’s principal activities are the provision of management and advisory services to certain debt investment vehicles.
Scope & basis of disclosure
The disclosures in this section are made in respect of the UK Consolidated Group which includes PDML and its immediate parent, Permira Debt Managers Holdings Limited (“PDMHL”). PDML is a subsidiary of PDMHL. PDML is a BIPRU €50,000 Limited Licence firm (not permitted to hold client monies) that is authorised and regulated by the FCA. PDML is the only firm with a limited license in the UK Consolidation Group; PDMHL is a financial holding company and not an operating company.
Disclosures are made on a fully consolidated basis.
PDML is permitted to omit one or more of the required disclosures if the Board of PDML believes that the information is immaterial, proprietary or confidential. Materiality is based on criteria that the omission or misstatement of material information could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions. Proprietary information may include information on products or systems which, if it were shared, would undermine the company’s competitive position. Information is regarded as confidential where there are obligations to customers or other counterparty relationships binding the company to confidentiality.
Where information is omitted for any of these reasons, this is stated in the relevant section of the disclosure, along with the reason for the disclosure.
Risk management & material risks
Responsibility for risk management rests with the Board of PDML.
The Board has delegated day-to-day responsibility for management of PDML, including risk management, to the CEO, but overall responsibility remains with the Board. The CEO interacts with the Board formally at PDML’s board meetings, which occur regularly, and also informally on a regular basis.
The CEO is also a key part of PDML’s Credit Committee, Investment Committees and Advisory Groups, which are responsible for the investment review process, including oversight of the preparation of proposal documents by PDML’s credit analysts and are responsible for managing and advising on risks in both proposed investments and in current investments within the debt vehicles managed or advised by PDML.
The CEO is assisted by PDML’s CIO in respect of risks in investments within the debt vehicles. The PDML COO and the PDML Finance Director and Chief Risk Officer also assist the CEO with the identification and management of risks in PDML’s business.
Reports of risks and risk management are provided on a regular basis from the CEO to the board of PDML and from the CEO to the Permira group, including through the Chief Risk Officer reporting process.
The Directors have established appropriate risk management policies and procedures proportionate to the nature and scale of PDML’s business to help manage risk. The Directors have identified the following risks as being relevant to the business of PDML:
- Reputational risk: Damage to PDML's reputation or the reputation of the broader Permira group or funds could have an adverse effect on the business of PDML. The Directors believe that the long-standing experience of the Permira group and the risk management techniques and procedures in place across the Permira group, including PDML, effectively manage, to the extent possible, reputational risks.
- Business risk: PDML could be exposed to substantial risk arising from the difficulty of its key clients to operate in an environment where liquidity is not available. As a fee-based management and advisory business, PDML’s key business risk is the loss of fee income. The Directors believe that business risk, and particularly that associated with the loss of fee income from its existing customers, is low due to the contractual nature of its relationships with those customers. The Directors have carried out various stress tests to look at business risk in more detail in order that business risk is mitigated as effectively as possible.
- Credit risk: Although not a direct risk for PDML, the exposure of the underlying debt vehicles managed or advised by PDML to the credit risk of the investee companies may have implications for PDML's business. Credit risk manifests itself as a direct risk to PDML through business risk (see above).
- Market risk: This may have indirect implications for PDML's business. PDML's clients are active in the debt markets and any weakness in those markets may have implications for PDML. PDML’s direct exposure to market risk is limited to foreign exchange fluctuations and the Directors believe that they have appropriate measures in place to effectively mitigate market risk.
- Operational risk: PDML shares some of the operational support of the Permira group (for example, IT and HR) and its operational capacity is interlinked with the ability of the Permira group to provide it with such support. The Directors feel confident that PDML can take significant comfort from its Business Continuity Plans (BCP) and IT back-up systems which provide a back-up of all files and provide PDML with alternative server and disaster recovery site capabilities.
- Liquidity risk: Liquidity risk is the risk that a firm may not be able to meet its obligations as they fall due or cannot do so without excessive cost. PDML may be exposed to liquidity risk through the loss of fee income or the loss of access to cash deposits (1). Appropriate and regular monitoring by the PDML Board has been established to ensure the company meets FCA requirements as set-out in BIPRU 12.
Each of these risks is considered to be low and all of these risks are within PDML's risk appetite. In addition the Directors believe that they have appropriate procedures and controls in place to monitor and manage these risks.
PDML is the only subsidiary of PDMHL. PDML and PDMHL together form the UK Consolidated Group for the basis of reporting to the FCA.
PDML is a limited licence firm and as such it is required to maintain Pillar 1 capital equal to the greater of:
- the base capital requirement of €50,000, or
- the sum of its market and credit risk requirements, or
- its fixed overheads requirement.
PDML uses the standardised approach to calculating credit and market risk and the fixed overheads requirement has been calculated in accordance with the rules as set out in GENPRU 2.1.53. Currently, the fixed overheads requirement exceeds both the sum of PDML’s market and credit risk requirements and PDML’s base capital requirement. PDML’s Pillar 1 requirement is therefore its fixed overhead requirement.
The available capital resources for both the UK Consolidated Group and for PDML on a stand-alone basis are set out in the table below and relate to the financial position as at 31 December 2016. These disclosures are updated annually and are not subject to audit. The available liquid capital resources, net of deductions, exceed the Fixed Overhead Requirement.
31 December 2017
All figures in £’000
|UK Consolidated Group||PDML|
|Tier 1 Capital|
|Ordinary share capital||6,541||6,275|
|Capital contribution & reserves||(1,106)||(1,112)|
|Additional Tier 1 capital|
|Preference share capital||-||-|
|Deductions from Tier 1 & additional Tier 1 capital||-||-|
|Total liquid capital, net of deductions||5,435||5,163|
|Pillar 1 & 2 Capital|
|Credit risk and market risk||(884)||(1,409)|
|Fixed overhead requirement||(1,641)||(1,638)|
|Additional capital required for Pillar II||(500)||(500)|
There are no known current or foreseen practical or legal impediments to the prompt transfer of capital resources or repayments of liabilities between PDMHL and PDML.
Compliance with rules in BIPRU and Pillar 2 rule requirements
Our overall approach to assessing the adequacy of our internal capital is set out in PDML’s Internal Capital Adequacy Assessment Process (“ICAAP”). PDML’s ICAAP is an ongoing process involving both senior management and the Board of PDML. The stress case scenarios that are included in the ICAAP are developed by senior management and challenged and approved by the Board.
The ICAAP document is regularly reviewed by senior management and the Board and approved by the Board. The ICAAP involves the consideration of risks to PDML’s capital combined with stress testing using scenario analysis. PDML assesses the impact caused by the various potential risks by modelling the changes in its income and expenditure over a 3-5 year time period. PDML’s risk assessment, through the ICAAP process, has demonstrated that the current available liquid capital resources exceed the relevant regulatory capital requirements, even under the stress case scenarios, and are sufficient to carry out the firm’s strategy and business plan.
(1) PDML considers the risk of not receiving these income flows to be low and therefore the liquidity risk as a result of losing these fees to be low.