Dual currency funds: worth the pain?

Structuring a multiple currency fund can win points with investors, but may result in some back office headache.

Last month, Apax Partners closed its eighth vehicle with $7.5 billion in commitments. One of the things we found most interesting in PE Manager's newsroom, was that those commitments were split evenly between US dollars and euros.
 
The strategy has popped up before. In November, Advent International closed a $10.8 billion fund that reportedly accepted both euro and US dollar commitments.
 
The decision by Apax and Advent to offer investors the dual currency choice had a great deal to do with when they were fundraising; both were in the market at a time when the fate of the euro was anything but clear and limited partners were particularly nervous about euro-denominated funds

While the euro has since stabilized, multiple currency funds continue to attract attention for their use in managing foreign exchange risk, in particular, for firms with a cross-border investment strategy. A European manager investing in Europe and the US would not have the annoyance of needing to make currency adjustments at the portfolio company level in the US when transacting in dollars, for example.
 
But before structuring a multiple currency fund, firms should be aware that doing so can be a real nuisance for the back office. A fund manager's finance team will, for instance, need to ensure that capital is called at the same rate across currencies – a task not without its complexities. Legal experts say sister vehicles that sit below the fund, each created to carry its own currency, will be invested into by different LPs. Working the math so that one vehicle, for instance, is not 45 percent called, while the other is 85 percent called – perhaps because one currency was being favored over another –  can be a challenge.
 
A few solutions to balancing sister currency vehicles exist, but none of them are perfect. One option is for GPs to negotiate an exchange rate upfront that is used throughout the fund’s entire lifecycle. The downside here is the possibility of a currency experiencing a significant swing in value, creating a mismatch in the pre-agreed rate, and the market exchange rate at the time of an investment (not to mention getting your LPs to agree an exchange rate in the first place).
 
Another option is to use the exchange rate at the time of the investment, but that still leaves investors open to a degree of currency risk.
 
Equalizing the currency vehicles can become especially complex following a first close if there is no pre-agreed rate. When the fund starts investing after the first close, but receives new commitments from LPs afterward, there is a need to balance the new LPs investing in multiple currencies into the investments the fund has already made. This can get complex when the exchange rate has moved significantly, note fund formation lawyers.
 
Firms should also be aware that structuring a fund that accepts more than one currency means increased legal fees and ongoing administrative costs. One source estimates that administrative costs for a dual currency fund can be as much as 50 percent higher than a single currency fund. 
 
So although multiple currency funds can be good way of bringing on investors in a tough fundraising environment, GPs need to ensure that their back office has the capacity to clear the administrative and legal hurdles it presents.