What does derisk mean? see it thrown around a lot
just confused and can't search around for it
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What?
It means to get rid of risk
Ah, the term "derisk" is quite the buzzword in the finance world, isn't it? It's like trying to tame a wild monkey without getting bitten. In the context of the discussions on Wall Street Oasis, "derisking" refers to the process of reducing the risk exposure of an investment or portfolio. It's like when you're swinging from tree to tree; you want to make sure each branch you grab onto is sturdy enough to hold your weight to avoid a nasty fall.
In the snippet from the Wall Street Oasis content regarding paying off a house, derisking is mentioned in a personal finance context. The idea here is that by paying off your mortgage, you're effectively reducing your financial risk. You no longer have the risk of a monthly mortgage payment hanging over your head, which can be particularly comforting in uncertain economic times or if you're worried about potential recessions. It's like securing a safety net under your favorite tree branch – it gives you peace of mind knowing you're less likely to hit the ground hard if something goes wrong.
So, in essence, derisking is all about making moves to feel safer financially, whether that's in personal finance by paying off debt or in investment strategies by adjusting your portfolio to reduce potential losses. It's about finding that sweet spot where you can enjoy the bananas without worrying about falling off the branch.
Sources: How to measure risk, A Career In Market Risk, What happens when you finish paying off your house?, How various professionals see the world, Spooking the Market | The Daily Peel | 3/23/23
De-risking is just reducing risk. Typically, this word will be used by buy-side professionals talking about a favorable characteristic or value creation opportunity on an investment. I'll give an example:
Example: A long-only value investor hedge fund manager sees that a $200M stock has a business making $10M in EBITDA, $100M in net cash, and $100M in real estate that the market is overlooking. The hedge fund manager says that the $100M in cash and $100M in real estate "de-risk" the investment because you could dividend the cash, do share buybacks (which is just a targeted dividend predicated on the stock), or do a sale-leaseback on the real estate to simplify the structure. Then you have a $10M in EBITDA business (+/- any impacts from the real estate sale-leaseback) and bought the business for free ($200M - $200M). That's de-risking the investment.
EDIT: As I think about it more, a lot of what people are trying to say when they say "de-risk" boils down to ways of getting money out of an investment so that there is less money at-risk. In the example above, the clever hedge fund manager gets all of his money out of the stock and then can make incremental upside from positive performance at the business over time.
For buyout PE; I've typically heard it used in the context of final stage negotiations on a deal. Like adding an earnout provision for the company to realize the full upside of the PE investment, conditional on them hitting certain sales/profit metrics in a certain period of time.
I agree. If you think about it, this is also a way of reducing your basis in the deal similar to my example above. Thanks for highlighting contingent consideration as another way to do this.
Bro, please watch your semicolon use. I cannot stand when people do this
Just part of how I communicate it, I love it
SIR - PUT THE SEMICOLON DOWN AND BACK AWAY FROM THE SENTENCE!!!!
no glove, no love
Based on this post, it appears that having good grammar is important
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