P.61 Investment risk management

61 02. Foundations for Accelerating Transformation

Investment Risk Management

Following an investment, we implement a “100-Day Plan” as the initial phase of the PMI*1. This includes establishing business-specific KPIs to enhance management visibility, developing a medium-term management plan to maximize enterprise value, and building a governance structure. We also provide ongoing support to investees based on our GMP*2 (see Figure 6). Through our investee monitoring framework, meanwhile, we regularly review our portfolio companies with a focus on the growth potential and profitability of each investee. Our business groups periodically assess the strategic rationale for holding each investment, while the Management Council reviews and discusses ownership strategies for large-scale investments. For new investments above a specified threshold, post-investment reviews are conducted against the original investment plan to identify emerging issues at an early stage and implement corrective actions where necessary (see Figure 7). In parallel with identifying exit candidates based on our exit criteria (see Figure 8), we are working to transform our business portfolio and accelerate portfolio turnover. We also support the enhancement of investment capabilities and know-how through internal training programs based on past investment cases and lessons learned from unsuccessful investments, as well as through the development of investment-related playbooks. In addition, we promote personnel exchanges between business groups and risk management–related departments to develop talent and further strengthen our investment and business management capabilities (see Note 9).

Phase II. Investment execution → Investment monitoring Figure 6: Formulation and implementation of the 100-Day Plan as PMI

• Development of management infrastructure including the governance system
• Formulation of medium-term management plan
• Development of specific value enhancement initiatives by the Company
• Setting and monitoring of optimal KPIs
• Establishment of an optimal management team to drive value enhancement
• Design of evaluation/compensation system for investee management We are building a foundation for the early stabilization of our investees and the steady enhancement of their business value. For large-scale projects, PMI is carried out by cross-functional teams that include relevant corporate functions.

Figure 7: Business portfolio review focusing on the growth potential and profitability of investees and the progress of new investment projects

• All consolidated subsidiaries are classified into four quadrants based on the EBITDA growth rate and EVA*3, and each business group periodically reviews its holding policies.
• For large business companies that have a significant impact on our overall company-wide performance, the Management Council discusses the holding policy for each company, taking into account the category of four quadrants and market value trends.
• For new investment projects above a certain threshold, we review performance and progress against the original investment thesis during the first several years following the investment by comparing actual results with the original investment plan. The results are then reported to the Management Council.
• Earning power Growth
• Earning power Contraction
• Y-axis: EBITDA CAGR X-axis: EVA
• Ⅱ Earnings growth EVA Accelerate growth and improve efficiency
• Ⅰ Earnings growth EVA Pursue sustainable growth
• Ⅲ Earnings growth EVA Transformation/withdrawal
• Ⅳ Earnings growth EVA Explore new strategic options
• Economic value added
• Economic value added

Figure 8: Exit criteria

• In principle, any investee that triggers the exit criteria should be designated for exit. If a turnaround strategy is pursued, a turnaround roadmap with predefined exit triggers must be developed and the necessary internal approvals should be obtained.
• The policy for portfolio companies that trigger the exit criteria, as well as the progress of their exit or business turnaround plans, is reported to the Management Council semiannually.
• Exit criteria

Cumulative losses on a consolidated basis over the last three fiscal years and negative EVA in the last fiscal year For new investments, the degree of variance from the original investment plan is also considered

• Meets exit criteria Exit Develop an exit execution plan
• Meets predefined exit triggers Turnaround Establish predefined exit triggers and develop a turnaround roadmap

Note 9: Investment-related training, internal materials, and personnel exchanges

• Leveraging best practices from across the Group and lessons learned from past investment challenges, we deliver internal training programs covering practical aspects of investment execution, including financial modeling,

due diligence (DD), documentation, PMI, and governance. In addition, we have developed tools such as M&A playbooks and divestment playbooks to strengthen practical investment capabilities across the organization.

• We also promote personnel exchanges between business groups and the risk management–related departments to cultivate professionals with expertise in both investment execution and portfolio management.
• *1 Post-merger integration (PMI): Post-investment integration activities aimed at generating synergies and enhancing corporate value
• *2 Group Management Policy (GMP): A policy that sets forth the principles and framework to be respected by Sumitomo Corporation and its Group companies in pursuing the maximization of the Groupʼs overall corporate value. The GMP is founded on three principles:

Jiritsu (Self-discipline), Dialogue, and Collaboration.

• *3 Economic value added (EVA): Economic value added after deducting the cost of capital applicable to each business