FX markets in particular have been extremely volatile in recent years, driven by geo-political events such as Brexit, macroeconomics, balance of trade and differentials in interest rates amongst other variables. G10 currencies including GBP, USD and EUR have historically traded percentage moves within intra-day timeframes and more than 10% moves within a week or two (Eg. Between March 9-17, 2020; GBPUSD moved 12.69% as an indication).
Given the scale of the risks involved, private equity exposes themselves to unnecessary FX risk when leaving commitments such as; capital calls or the signing/closing period unhedged.
We have partnered with a leading FX provider to support the private equity sector and use FX products to remove associated risks. Our solution supports clients with uncollateralised capital call facilities or at least reduced margin deposit facilities.
- Competitive rates compared to other providers
- Access to dedicated FX dealer from strategy to execution
- Uncollateralised capital call facilities or reduced margin deposit facilities
- Improved investor relations by not having to issue additional capital calls
- Hedging currency risk, removing the need for cash buffer
How does the process work?
- The FX provider supports the PE manager with a short dated hedging line to fix the capital call
- This allows the vehicle to ‘call down’ the exact amount of capital from the investor pool (as the exchange rate has been fixed)
- This solution removes the requirement for the PE manager to ‘over-call’ capital to allow for FX fluctuations within the requisite call period
- The FX provider can offer flexibility around the settlement date of the FX hedge to allow for unexpected delays in the monies arriving
- The PE manager can utilise the hedge early if the monies arrive earlier than anticipated1
- This simple strategy removes the risk of adverse movements within the call period
- The FX provider would look to offer this hedge without requiring any upfront cash/collateral against the short-dated FX hedge
Risk: By fixing your FX rates using forward contracts, you will be prevented from benefiting from any potential favourable rate movements in the spot market during the call period.