This year Nigeria's Business Day published article about the biggest headache for PE companies that invests in Nigeria. Article was ,, Private equity investors says FX risk is their biggest headache in 2020.'' 

After this read it is worth to analyse how PE companies that operate outside their functional currency can be exposed to FX risk. The risk of currency depreciation has been the biggest worry for private equity investors in Nigeria since 2014 and it’s no different this year. The naira has shed more than 70 percent since 2014 and that has been a nightmare for several private equity investors who manage dollar funds. Same problematic is for other PE companies in frontier markets. Corphedge works hard on creating solutions to hedge fx risk for PE and asset managers more cost effective.

How PE companies are exposed to FX risk?

Acquisition cost

When buying a foreign currency asset, funds will have to arrange an exchange upfront, which may create its own risk if FX movements change the investment amount.

Asset value

Bigger still is the impact currency volatility can have during the hold period, with many examples of funds experiencing currency depreciation which mitigates, or totally erodes, hard-won investment gains.

Management fees

Receiving management fees in a non-base currency makes income susceptible to FX movements. For example, if you were an euro-denominated fund with a cost base in poland.

Investors

Funds may want to create a broader investor which could involve offering feeder funds or share class hedging to a diversified client base in multiple jurisdictions. 

How PE companies hedge currency exposure?

Given the uncertain and illiquid nature of private equity, it’s typical that a fund have to roll hedges and change the delivery date, either moving the contract expiry further out or bringing it in. At the time of rolling the deal, the fund have to settle paper mark to market loss or get profit, and re-hedge at the new improved rate.

CorpHedge networks database

Corphedge is a database that collect requirements from many PEs, asset management companies, big corporates that are looking at the opportunities to save on hedging and to be able to trade direct with other buy side firms without middleman. PE companies just put their future hedging requirements into a database and our algorithm shows how much of their total notional required can be matched with other participants in a pool. System shows estimate savings - how much PE can save money for hedging their requirements compared with traditional sources. PE are very sensitive to cash requirements  due to illiquid nature (for ex,. like margin calls). To trade direct with the other funds that are working with same principles and use passive hedge strategies can be cost effective, capital effective and safe, because CorpHedge banking partners works as a credit sponsors in a system. Our platform aims to expand PE investments into emerging markets and match their currency requirements through alternative liquidity network.