The following risk disclosure is a summary of material risks that could adversely affect the value of an investment in our strategies. Any discussion of risks herein is superseded by and subject to any risk discussion in the offering documents of any strategy and Providence’s Form ADV Part 2A.
Risks Related to the Nature of a Strategy’s Investments
Many of a strategy’s investments will be highly illiquid, and there can be no assurance that a strategy will be able to realize a return on such investments in a timely manner. Consequently, dispositions of such investments may require a lengthy time period or may result in distributions of securities in kind to investors that may or may not be marketable. Certain securities in which a strategy will invest will be the most junior in what typically will be a complex capital structure, and thus subject to the greatest risk of loss. Certain of a strategy’s investments are in businesses with little or no operating history. Certain of a strategy’s investments may be in portfolio companies with high levels of debt or may be in leveraged buyouts. Leveraged buyouts by their nature require companies to undertake a high ratio of fixed charges to available income. Such investments are inherently more sensitive to declines in revenues and increases in expenses. To the extent a strategy makes debt investments, such strategy will be subject to additional risks, including those related to credit and market risks and special risks associated with investing in bank loans and participations, unsecured loans, second-lien loans, non-investment grade debt and other loans and debt instruments. Since certain strategies will only make a limited number of investments, and because a strategy’s investments generally will involve a high degree of risk, poor performance by a small number of investments could severely affect total returns to a strategy and its investors.
Highly Competitive Market for Investment Opportunities
The business of Providence is highly competitive and the success of a strategy as a whole depends upon the identification and availability of suitable investment opportunities. The activity of identifying, completing and realizing attractive investment opportunities is highly competitive and involves a high degree of uncertainty, especially with respect to timing. The availability of investment opportunities will be subject to market conditions, the prevailing regulatory conditions or the political climate in industries and regions in which a strategy may invest and other factors outside the control of a strategy. There can be no assurance that a strategy will be able to identify and complete investments that satisfy its investment objectives, or realize the value of such investments, or that it will be able to invest fully all of its capital commitments.
Lack of Diversification Risk
A strategy may not be highly diversified. Lack of diversification would expose a strategy to losses disproportionate to market declines in general if there were disproportionately greater adverse price movements in the particular investments held by a strategy. To the extent a strategy invests a relatively high percentage of its assets in a limited number of portfolio companies, countries, regions, markets, industries or sectors, a strategy will be more susceptible than a more widely diversified investment partnership to the negative consequences of a single corporate, economic, political or regulatory event.
Investing in Growth Businesses
Certain strategies expect to make investments in growth companies. These companies may be characterized by short operating histories, evolving markets, intense competition and management teams that have limited experience working together. A portfolio company may need to implement appropriate sales and marketing, inventory, finance, personnel and other operational strategies in order to become and remain successful. A strategy’s returns will depend upon the applicable general partner’s ability to find and invest in companies that can successfully combine these strategies where products and markets are constantly evolving. There can be no assurance that the applicable general partner will be able to find and invest in a sufficient number of these companies to meet investor return expectations.
A strategy may seek certain portfolio investment opportunities that allow the strategy to either acquire control or exercise significant influence over the management, operation and strategic direction of certain portfolio companies in which it invests. The exercise of control and/or significant influence over a company imposes additional risks of liability for regulatory non-compliance, environmental damage, product defects, failure to supervise management and other types of liability in which the limited liability of business operations may be ignored. The exercise of control and/or significant influence over a portfolio company could expose a strategy to claims by such portfolio company, its security holders, its creditors and its regulators. While Providence intends to manage the strategy in a way that it believes will minimize exposure to these risks, the possibility of successful claims cannot be precluded.
Risks Related to Reliance on Management of Portfolio Companies
While it is generally Providence’s intent to invest in companies with established operating management in place, there can be no assurance that such management will continue to operate the companies successfully. Although Providence will monitor the performance of each investment, Providence will rely upon management to operate the portfolio companies on a day-to-day basis.
General Market and Economic Conditions
Portfolio companies may be materially affected by market, economic and political conditions in the U.S. and in certain cases in non-U.S. jurisdictions, including factors affecting interest rates, the availability of credit, currency exchange and trade issues. These factors could adversely affect liquidity and the value of a portfolio company and/or reduce the ability of Providence to make new investments.
Certain strategies are exposed to risks of investments outside of the United States, including currency exchange risk, inflation risk, tax risk and geopolitical risk, among others.
Risks Related to Pandemics and Other Diseases
The global outbreak of the novel coronavirus (“COVID-19”) has resulted in, and will continue to result in, for the foreseeable future, restrictions on travel, limitations on transportation, production and sale of goods and services, prohibitions on large events, efforts to engage in “social distancing”, and shelter in place practices that have continued to meaningfully disrupt the global economy and certain of Providence’s portfolio companies and, given the unprecedented nature of COVID-19, has introduced greater uncertainty regarding future market conditions and portfolio company results. New variants and low rates of vaccination in certain parts of the world have hampered recovery efforts and continue to create further uncertainty. Even as restrictions have been lifted in certain jurisdictions, they have been reimposed in others, and this pattern could continue as certain jurisdictions experience resurgences of COVID-19. Although the long-term economic fallout of COVID-19 is difficult to predict, it has contributed to, and is likely to continue to contribute to, market volatility, inflation and systemic economic weakness. As the world adapts to a new outlook on how to balance the risk of illness against the desire for in person human connection, the COVID-19 pandemic and its effects are expected to continue through 2023 and beyond, and therefore the economic outlook, particularly for certain industries and businesses, remains inherently uncertain.
The ongoing market volatility and uncertainty could also adversely affect a strategy. For example, negative performance and general economic distress across markets could spur significant redemptions for certain strategies, which would make it difficult to liquidate assets and may lead to a suspension of redemptions for such strategies. Similarly, large redemptions, even when fulfilled, could make it difficult for Providence to execute its investment strategy or could cause breaches of various trading agreements, causing further distress and performance decline.