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FoR betteR GoveRnAnce Annual Report 2022 119

Hedging and Derivative Products Real Estate

A variety of derivative contracts are used to manage KWAP’s real estate investments are diversified both
market risk exposures on KWAP’s investments especially domestically and internationally. Portfolio construction
on currency and interest rate movements. Derivative is important in this space which relies on diversification
instruments used to manage those exposures are Cross of geography and asset types which provides risk
Currency Swaps (CCS), Interest Rate Swaps (IRS) and diversification and naturally reduces the sum of individual
Foreign Exchange Forward contracts (Fx Forward). KWAP property risk to a lower portfolio risk level. The properties
mainly uses Fx Forwards to hedge and mitigate currency are long-term in nature; hence the risk is structural as
volatility on KWAP’s overseas investments. opposed to transactional. Besides being exposed to
the movement on real estate prices, management of the
PRIVATE MARKETS RISK MANAGEMENT rental leases and operating costs are also important in
As at 31 December 2022, KWAP’s total exposure in maintaining a sustainable income stream. Risk
private investments was at 10.3% of KWAP’s total asset. management activities for real estate investment
KWAP’s private investments consists of private equity, portfolios are focused on pre-investment assessment
infrastructure and real estate investments. vis-à-vis independent risk review as well as
post-investment monitoring vis-à-vis risk limits. As at
Private Equity and Infrastructure 31 December 2022, KWAP’s total exposure in real estate
stood at 4.4% of KWAP’s total asset.
Risk management of private equity funds, infrastructure
and direct investments were typically concentrated in CREDIT RISK MANAGEMENT
the pre-appointment evaluation of its managers and
investment strategies. Getting the right managers in Credit risk is defined as the probability of losing principal
is the key to building a successful, healthy investment or income from failure of obligors, counterparties or
portfolio. Post-investment activities concentrated in issuer of securities to meet contractual obligations in
operational risk management and monitoring of the funds accordance with agreed terms.
with potential red flags as well as to possible write-offs The purpose of credit risk management is to keep
or losses with adherence to risk limits. The ability to exit credit risk exposures within an acceptable level and to
in private equity funds post-investments are severely ensure the returns commensurate with the risk taken.
limited due to the illiquid nature of the asset class. KWAP is responsible for developing, enhancing, and
communicating effective and consistent credit risk
KWAP is constantly developing its knowledge and skills management policies, guidelines and methodologies
to improve risk management of these markets which has across KWAP to ensure that appropriate standards are
grown and become attractive for investors as opposed in place to identify, measure, control, monitor and report
to traditional assets such as equity and bonds. As at such risks. These are carried out mainly through the Credit
31 December 2022, KWAP’s total exposure in PE and Risk Management Policies and Credit Risk Management
Infrastructure stood at 4.0% and 1.9% of KWAP’s total Guidelines. Industry best practices are instilled via
assets, respectively.
continuous updates of credit risk policies, guidelines, and
processes with the objective of minimising credit defaults
and losses.