Strategy Risk

An AIF invests behind a specific thesis. It backs a company because of the business strategy that company is pursuing. Strategy risk is the risk that the company changes course after the fund has invested. If the company drifts away from that strategy, it undermines the very thesis the fund backed.

The workbook calls this "change in or divergence from business strategy". It sits at the investee company level. In other words, it is about the company's own strategic direction, not the fund's.

Like realisation risk, strategy risk is one of the risk categories an AIF must disclose to investors under Regulation 22 of the AIF Regulations, as part of the material-risks section of the fund's annual report, due within 180 days of the year end. The full list alongside it includes concentration risk and foreign exchange risk (fund level), leverage risk and realisation risk (fund and investee company level), reputation risk (investee company level), and extra-financial ESG risks (fund and investee company level).

Because strategy risk is specifically pinned to the investee company level, it is the manager's job — as part of active portfolio management and monitoring — to track whether a portfolio company is staying true to the strategic plan the investment was made against, and to intervene, through board representation or investment committee rights, if the company's management starts to diverge from it.

Meridian Venture Fund invests Rs 15 crore into a company on the strength of its stated strategy: build a direct-to-consumer subscription business in a defined product category, reinvesting all cash flow into customer acquisition for five years before targeting profitability.

Eighteen months in, the company's founders pivot — without consulting the fund's board nominee in advance — to a wholesale distribution model targeting a completely different customer base, chasing faster near-term revenue at the cost of the subscription economics the fund had originally underwritten.

This is a textbook strategy risk event: the company has diverged from the business strategy Meridian invested behind, even though nothing about the exit environment (which would instead be realisation risk) has changed. Under Regulation 22, Meridian must disclose this strategy risk, and how it is managing it — for instance, through its board nominee pushing for a return to the original plan, or renegotiating investment terms — in its next annual report to investors, due within 180 days of year end.

Chapter 10, section 10.2.1, lists strategy risk in the same Regulation 22 disclosure table as realisation risk, glossed as "change in or divergence from business strategy" at investee company level. Expect strategy risk tested as a matching or fill-in-the-blank question against its precise gloss, and paired against realisation risk as the discriminating pair within this risk list.

• Strategy risk is specifically an investee-company-level risk in the workbook's classification — unlike realisation risk or leverage risk, which the workbook applies at both fund and investee company level.
• Strategy risk is about the company changing its own strategic direction, not about the fund's investment strategy itself changing — the workbook's language ("divergence from business strategy") points at the investee company, not the AIF.
• This is a Regulation 22 disclosure item, reported within 180 days of year end — the same annual reporting cycle as realisation risk and the other risks in the same list.
• Do not confuse strategy risk with a fund-level change in the AIF's own stated investment strategy, which is a fundamental-attribute-type change requiring separate investor consent processes, not simply an annual risk disclosure.