Risk Management Across a $70 Billion Middle-Market Portfolio

Private equity involves taking calculated risks. Investment returns come from bearing risks others avoid or cannot manage effectively. However, unsuccessful risk-taking destroys capital. Managing this balance determines long-term performance.

Sami Mnaymneh built HIG Capital’s risk management approach around centralized oversight, diversification and operational focus. The firm now manages $70 billion across over 100 portfolio companies spanning seven strategies and 19 offices worldwide.

Understanding how HIG Capital manages risk while pursuing middle-market opportunities offers insights into building sustainable investment platforms.

Centralized Approval

Mnaymneh personally approves every capital commitment HIG Capital makes despite the firm’s scale. This centralized decision-making creates the first risk management layer.

Individual teams cannot pursue transactions without ultimate founder review. This prevents situations where distributed authority allows marginal decisions to proceed. Each investment must satisfy consistent criteria before receiving approval.

The approval requirement forces rigorous analysis. Teams must present opportunities addressing key questions about market attractiveness, competitive positioning, management quality and value creation plans. Incomplete analysis gets challenged, requiring additional work before proceeding.

Centralized review also enables pattern recognition across hundreds of transactions. Mnaymneh has evaluated deals in dozens of industries across multiple geographies and economic cycles. This accumulated experience informs risk assessment of new opportunities.

Before founding HIG Capital with Tony Tamer in 1993, Mnaymneh built expertise through roles at Morgan Stanley and The Blackstone Group. He graduated first in his class at Columbia University with a B.A. summa cum laude, then earned both a J.D. from Harvard Law School and an M.B.A. from Harvard Business School with honors.

However, centralized approval also creates constraints. Investment teams must coordinate schedules to present opportunities. Time-sensitive situations may face delays if Mnaymneh is unavailable. Competitors with distributed authority can sometimes move faster on transactions requiring rapid decisions.

Portfolio Diversification

HIG Capital manages risk through diversification across multiple dimensions. The firm operates seven distinct strategies: private equity, growth equity, direct lending, real estate, infrastructure, special situations debt and growth-stage healthcare.

Different strategies respond differently to market conditions. When equity markets face headwinds, debt strategies may perform well. Real estate and infrastructure provide different risk-return profiles than operating companies. This diversification reduces concentration in any single approach.

Geographic distribution provides additional diversification. The firm operates across North America, Europe, Latin America, the Middle East and Asia. Economic challenges in one region may not affect others similarly. Currency diversification also provides some risk management benefits.

Sector diversification spreads risk across healthcare, technology, business services, consumer products, industrials and other industries. Different sectors respond differently to economic cycles, technological change and regulatory developments.

Portfolio company count also matters. Managing over 100 investments reduces single-company concentration risk compared to firms holding 10-20 concentrated positions. Individual company failures hurt but don’t destroy overall portfolio performance.

Due Diligence Rigor

Thorough due diligence represents another risk management mechanism. HIG Capital employs over 500 investment professionals conducting detailed analysis before investing.

Financial due diligence examines historical performance, projections and cash flow modeling. Teams verify revenue sources, understand cost structures and validate assumptions underlying business plans.

Operational assessment evaluates competitive positioning, market dynamics and value creation opportunities. Can portfolio companies defend market positions? Do management teams possess capabilities to execute growth plans? What operational improvements are realistic?

Legal and tax diligence identifies potential liabilities and ensures transaction structures optimize tax efficiency. Environmental assessments for relevant industries identify potential cleanup obligations or compliance issues.

Management evaluation assesses leadership quality and capability. Teams with proven track records executing similar plans present lower risk than unproven management pursuing ambitious strategies.

The operational focus enhances risk assessment. Investment professionals with operating backgrounds better evaluate business fundamentals than pure financial analysts. This operational lens improves risk identification.

Structured Downside Protection

Transaction structures incorporate downside protection mechanisms. Loan covenants in lending transactions establish financial maintenance requirements. Security packages define collateral backing loans. Seniority determines payment priority relative to other obligations.

WhiteHorse, the direct lending arm, emphasizes senior secured structures. First lien positions provide downside protection through priority claims on assets. The platform closed its fourth fund at $5.9 billion, demonstrating institutional confidence in the risk-managed lending approach. Conservative loan-to-value ratios create cushions if credits deteriorate.

Equity investments also incorporate protections when possible. Preferred equity receives priority over common stock. Management incentives align with value creation through equity participation. Board representation allows monitoring portfolio company performance and influencing decisions.

However, middle-market investments often involve less structural protection than large-cap transactions. Smaller companies may lack assets for extensive security packages. Covenant structures may be simpler than sophisticated credit agreements governing large syndicated loans.

This requires relying more on business quality assessment and operational support rather than purely structural protections. The operational focus becomes more important when legal structures provide limited downside defense.

Active Portfolio Management

Risk management continues post-investment. HIG Capital works actively with portfolio companies monitoring performance, addressing challenges and pursuing opportunities.

Board representation provides visibility into operations. Regular board meetings allow tracking results against plans, discussing strategic initiatives and identifying issues requiring attention.

Financial monitoring systems track portfolio company performance. Monthly or quarterly financial reports reveal trends before they become crises. Covenants in debt investments trigger early warnings when companies approach financial thresholds.

Operational support helps portfolio companies navigate challenges. Access to HIG Capital’s expertise and networks assists companies addressing supply chain disruptions, competitive threats or other issues.

However, active management also creates resource demands. Supporting over 100 portfolio companies across diverse industries and geographies requires substantial professional capacity. The firm must balance attention across portfolio rather than concentrating on struggling investments.

Cycle Management

Economic cycles present significant risks to private equity portfolios. Recessions affect revenue, profitability and exit valuations. HIG Capital has managed through multiple downturns over three decades.

The dot-com bust in 2000-2002 affected technology investments. The 2008 financial crisis created broad economic contraction and frozen credit markets. COVID-19 caused sudden revenue disruptions across many sectors.

Each cycle tested risk management approaches. Portfolio construction that seemed diversified during expansion sometimes concentrated unexpectedly during downturns when correlations increased across industries.

The middle-market focus provided some resilience. Smaller companies have limited access to public capital markets regardless of economic conditions, creating consistent demand for private capital. However, downturns still affected valuations, leverage availability and exit timing.

Conservative leverage practices helped manage downside. Avoiding excessive debt loads on portfolio companies provided financial flexibility during revenue disruptions. Companies with manageable debt service could navigate downturns better than highly leveraged competitors.

Avoiding Concentrated Bets

Position sizing represents another risk management tool. HIG Capital typically doesn’t concentrate excessive capital in single investments. While exact position limits aren’t disclosed, portfolio company count suggests relatively modest concentration in any individual holding.

This differs from some private equity approaches involving concentrated portfolios with high conviction in limited investments. Concentrated strategies offer greater upside if successful but create substantial downside if key investments fail.

HIG Capital’s approach trades some potential upside for downside protection. Portfolio diversification reduces chances of catastrophic losses from single investment failures. This conservative positioning prioritizes capital preservation alongside return generation.

However, diversification also creates challenges. Managing 100+ investments requires substantial resources. Teams must track numerous portfolio companies rather than focusing intensely on smaller holdings. This operational complexity creates its own risks.

Looking Forward

Risk management will determine HIG Capital’s trajectory as market conditions evolve. Current elevated interest rates, constrained exit markets and economic uncertainty create challenging environments for private equity.

The firm’s risk management approaches — centralized oversight, portfolio diversification, thorough due diligence and active management — have proven effective through previous cycles. Whether these methods continue working depends on execution and whether new risks emerge requiring adaptation.

For now, the framework Mnaymneh established continues guiding the platform. Three decades of managing through varying conditions suggests the approach has worked. How it performs through future challenges remains to be seen.