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 Any discussion of risks herein is superseded by and subject to any risk discussion in the offering documents of any strategy and PSG’s Form ADV Part 2A.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 PSG 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 and 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
The 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 PSG’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 PSG will 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 PSG 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 PSG’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 PSG will monitor the performance of each investment, PSG will rely upon management to operate the portfolio companies on a day-to-day basis.
General Market and Economic Conditions
Investments made by a strategy may be materially affected by market, economic and political conditions in the U.S. and in certain cases in non-U.S. jurisdictions in which such strategy operates, 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 strategy’s investments and/or reduce the ability of a strategy to make new investments. In addition, certain recent bank failures could be a sign of systemic economic weakness that could be revealed over time, and the effect on inflation of the related remedies by the U.S. federal government could cause further adverse economic implications. Such failures have also caused volatility in markets generally.
War and International Conflicts in Ukraine and Israel
An ongoing military conflict exists between Russia and Ukraine, which, in a relatively short period of time, has caused disruption to global financial systems, trade and transport, among other things. In response, multiple other countries have put in place global sanctions and other severe restrictions or prohibitions on the activities of individuals and businesses connected to Russia. On October 7, 2023, Hamas, a Palestinian militant group who has controlled the Gaza Strip since 2007, conducted a coordinated surprise civilian attack on Israel. In response, Israel declared war on Hamas and has begun a ground combat mission in the Gaza Strip. Across the Middle East region, tensions have risen, and there is concern that the Hamas-Israel war could expand to involve other regional powers and global actors. The ultimate course of conflicts, such as the Russia-Ukraine conflict and the Israel-Hamas war, and their impact on global economic and commercial activities and conditions, and on the operations, financial condition and performance of a strategy or any particular industry, business or country, including portfolio companies in Israel, as well as the duration and severity of such effects, is impossible to predict. Such conflicts may have a significant adverse impact and result in significant losses to a strategy, in particular related to the portfolio companies that operate in Israel. This impact may include reductions in revenue and growth, cyber attacks, unexpected operational losses and liabilities, and reductions in the availability of capital. It may also limit the ability of a strategy to source, diligence and execute new investments, and to manage, finance and exit investments in the future. Developing and further governmental actions (military or otherwise) and international negotiations over such conflicts may cause additional disruption and constrain or alter existing financial, legal and regulatory frameworks and systems in ways that are adverse to the investment objectives which a strategy intends to pursue, all of which could adversely affect a strategy’s ability to fulfill its investment objectives.
Inflation risk is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money (i.e., as inflation increases, the values of a strategy’s assets can decline). At times, governments may attempt to manage inflation through fiscal policy, such as by raising taxes or reducing spending, thereby reducing economic activity; conversely, governments can attempt to combat deflation with tax cuts and increased spending designed to stimulate economic activity. Inflation rates may change frequently and significantly as a result of various factors, including unexpected shifts in the domestic or global economy and changes in economic policies, and a strategy’s investments may not keep pace with inflation, which may result in losses to investors. In addition, if a strategy’s investment is unable to increase its revenue in times of higher inflation, its profitability might be adversely affected. A rise in real interest rates may also result in higher financing costs for a strategy or its investments, and could, therefore, result in a reduction in the amount of cash available for distribution to a strategy’s investors.
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 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 meaningfully disrupted the global economy and certain of PSG’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. 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, and therefore the economic outlook, particularly for certain industries and businesses, remains inherently uncertain.
Risks of Artificial Intelligence (“AI”)
PSG’s ability to use, manage and aggregate data may be limited by the effectiveness of its policies, systems and practices that govern how data is acquired, validated, used, stored, protected, processed and shared. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit PSG’s ability to manage current and emerging risks, as well as to manage changing business needs and to adapt to the use of new tools, including AI. While PSG may restrict certain uses of third-party and open source AI tools, such as ChatGPT, PSG’s employees and consultants and a strategy’s investments may use these tools, which poses additional risks relating to the protection of PSG’s and such investments’ proprietary data, including the potential exposure of PSG’s or such investments’ confidential information to unauthorized recipients and the misuse of PSG’s or third-party intellectual property, which could adversely affect PSG, a strategy or its investments. Use of AI tools may result in allegations or claims against PSG, a strategy or its investments related to violation of third-party intellectual property rights, unauthorized access to or use of proprietary information and failure to comply with open source software requirements. Additionally, AI tools may produce inaccurate, misleading or incomplete responses that could lead to errors in PSG’s and its employees’ and consultants’ decision-making, portfolio management or other business activities, which could have a negative impact on PSG or on the performance of a strategy and its investments. Such AI tools could also be used against PSG, a strategy or its investments in criminal or negligent ways.
Regulatory Proposals with Respect to Private Funds and Investment Advisers
PSG is subject to regulation by the U.S. Securities and Exchange Commission (the “SEC”). In recent years, the SEC has proposed and adopted several new rules and amendments to existing rules under the Advisers Act related to registered advisers and their activities with respect to private funds that fundamentally increase compliance costs and burdens on PSG and its strategies. In particular, on August 23, 2023, the SEC adopted rules and amendments (collectively, the “Private Funds Rules”) specifically related to private funds. The SEC has also recently proposed other new rules and amendments under the Advisers Act regarding ESG disclosures, safeguarding of client assets, additional Form PF reporting obligations (in addition to those recently adopted), cybersecurity risk governance, the outsourcing of certain functions to service providers, changes to Regulation S-P and the use of predictive data and associated conflicts of interest.
The Private Funds Rules and the other proposed rules, to the extent adopted, are expected to significantly increase compliance burdens and associated costs (which, to the extent permitted under the organizational and offering documents of a strategy, and consistent with the law and the Private Funds Rules, will be treated as partnership expenses borne by limited partners of a strategy) and complexity, and possibly restrict the ability to receive certain expense reimbursements in certain circumstances. This, in turn, also would be expected to increase the need for broader insurance coverage by PSG and increase such costs and expenses charged to a strategy and its investors. In addition, these amendments could increase the risk of exposure of PSG to additional regulatory scrutiny, litigation, censure and penalties for noncompliance or perceived noncompliance, which, in turn, would be expected to adversely (potentially materially) affect PSG and a strategy’s reputation, and to negatively impact a strategy in conducting its business (thereby materially reducing returns to investors). There can be no assurance that the Private Fund Rules and any other new SEC rules and amendments will not have a material adverse effect on PSG, the strategies, their investments and/or limited partners.