Advisory & Consulting Services Case Studies

Outsourced risk advice

Issue

Directors of the energy markets division of a large financial services company were driving high growth in their business through a move into physical energy trading. By doing so, the division would be able to take on and manage the physical exposures arising from energy assets being acquired by their parent company’s investment banking arm.

The directors also wished to assist the investment banking team to value potential energy asset purchases, and to offer financial hedges to external customers such as airlines, refiners, and other large energy users. Importantly, as a by-product of being active in physical markets, the division’s energy trading team also gained access to information of significant help in boosting profits from financial trading.

While an analytical risk resource was available to the energy trading team through the company’s internal operations, it was neither a dedicated resource, nor did it specialise in energy markets.

Therefore, a decision was taken to support the energy market division’s growth plans by outsourcing part of the division’s risk evaluation and deal analysis needs to a firm of well-regarded experts.

Critical to the success of this move would be the consulting firm’s ability to add value through advice on trading strategies across a broad and evolving range of scenarios. Equally important would be the deal support provided to the investment banking arm, supplementing discounted cash flow valuation techniques with additional perspective and insight (usually in the area of the asset’s embedded optionality), to guide more profitable asset price setting and bid decision making.

Solution

Lacima was chosen to provide these services because of its unique combination of practical experience in energy markets and its world-leading research base in valuation, hedging, and risk analytics. Of particular interest was Lacima’s ability to build tailored solutions to the team’s specific requirements in highly varied problem areas – and to do so rapidly, using well-proven methods and flexible analytical tools of known reliability.

Benefits

The move to an outsourced risk advisor enabled the energy trading team to significantly extend the financial services company’s ability to evaluate and participate in all facets of the energy sector.

The return on investment was further boosted by the energy market division’s decision to add this analytical capability without adding to fixed costs or headcount. The on-demand aspect was also viewed as of considerable benefit, since substantial peaks in workload could be accommodated smoothly while maintaining high quality.

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