There are a lot of reasons not to hedge currency risks in private funds, especially in private equity. The arguments are usually: timing hedges is hard; currencies tend to mean revert over time and PE investments are long term; it’s expensive; we are PE investors, not currency traders.
To be sure, big firms do have people dedicated to eliminating currency risk. But, historically, it’s not a thing many smaller PE firms seem to be bothered about, at least anecdotally. If they do, they tend to hedge with a relationship bank and often look to hedge just the exit period of an investment (the big ones spread it across several banks, probably getting better terms and pricing, and diversifying any potential counterparty risk.)
There’s been a trend of increasing cross-border activity in private funds for some time. And given more and more funds are looking to emerging markets with illiquid currencies, and you have Brexit, trade wars and who-knows-what next adding to currency volatility, it seems a good time to start a conversation about currency risk.
Here, I’m posting an exclusive on a just-launched firm that’s trying to simplify the whole equation, make it cheaper and more transparent, and generally educate CFOs on why this is all worth at least having a conversation about. Deaglo has a number of interesting propositions to make with its platform. It’s aiming to make FX hedging easier, more transparent on pricing, cheaper on collateral and execution costs, and potentially more customizable.
It’s not to say there are no banks providing similar services. But given bank risk appetite is more limited and regulatory capital cost higher, I’m inclined to think well-designed non-bank platforms could have quite a lot to offer in FX.
I’d love to hear your thoughts on this topic, or talk about your FX strategy (on background is good!).
We’ll be back in your inbox on Tuesday. Until then, enjoy the holiday weekend!
Email prepared by Graham Bippart