Joint ventures: how to manage the risks

Every business has to manage risk but, for housing associations, the need has never been greater.

Repercussions from the Grenfell fire tragedy combined with political and economic uncertainty has pushed risk management higher up the agenda.

For those considering joint ventures, the recent collapse of Carillion has also shone the spotlight on another risk – potential insolvency of a development partner – resulting in  substantial extra costs, time and resource in addition to potential reputational damage.

Despite this, the sector is showing no signs of withdrawing their interest in pursuing joint ventures. In fact, as was evident from discussions at the NHF’s Risk Management Conference 2018 which corporate partner James Lyons recently spoke at, many remain keen to explore growth opportunities with new partners across the public and private sectors.

As the operating environment becomes more uncertain, however, creating a successful joint venture will require a more thorough risk analysis and due diligence process.

Due diligence
Boards are naturally cautious about new partnerships, even more so post Carillion which highlights the importance of undertaking thorough due diligence on joint venture partners. This will involve a thorough analysis of factors such as their track record on similar developments, their ability to resource and deploy a team (in particular if, for example, that team may become over-stretched in taking over Carillion contracts), and the financial covenant strength of the partner to stand behind its obligations and mitigate insolvency risk.

Check culture and compatibility
For joint ventures to be successful, interests and objectives must be aligned.  Housing associations must therefore take the time to really get to know their potential partner – not only should respective business plans be shared, challenged and aligned, but there should also be a shared cultural vision together with strong trust and rapport between the partners. That trust and rapport would ideally be shared at both an executive and project operational level.

Whilst at an early stage of a joint venture, the relationship may be founded upon certain key individuals within the respective organisations, but there should ideally be buy-in across the whole of each organisation to mitigate the risks of key personnel leaving.

Prepare for the unknowns
Certain risks can be identified from the outset and apportioned or dealt with accordingly in the joint venture documentation.   These may include planning risks (for example, what should happen if planning is not obtained), pricing structure/risk (which party should bear cost- overruns, conscious that the parties’ interests will be aligned in maximising the profitability of the joint venture, thereby controlling the costs) and sales risk.  The scope of the services to be provided to the joint venture by one of the partners – and related fees – should be clearly set out and defined.

However, the parties should also consider how to manage the “unknown risks” –  although interests and business plans may be aligned at the outset, what happens if the parties can’t agree on matters further down the line?  What if the relationship was to break down?  What if one party needs to exit the venture early?  What if one party defaults on its obligations?  Often, it can be these unknowns which might bring the joint venture to a premature end – it is important to anticipate these from the outset and, where possible, to provide for appropriate resolutions within the joint venture documentation.

Prepare for the future
Forming a joint venture will never be without risks but this should not be considered a barrier. These partnerships are a fundamental part of the sector’s future and growth, so boards must think carefully about the exit result and have a clear strategy in place. Putting the right people and resources in place to identify and manage risk from the outset will pave the way for a strategic, successful relationship which benefits each party, local communities and the sector as a whole.

For further information please contact James Lyons, Corporate Partner or Jonathan Corris Real Estate & Projects Partner.

For further guidance on managing risk, we will be hosting a Managing Risk conference on 17th May 2018, including interactive seminars and workshops to discuss the biggest challenges and changes affecting the UK’s housing sector.

One of the key topics will focus on regeneration and joint ventures. Our experts Jonathan Corris and James Lyons will guide you through the risks and how to manage them effectively. To find out more about this event or to register your interest, please click here.

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