Record levels of private equity M&A activity during the heightened levels of currency volatility seen recently has drawn foreign exchange (FX) management into the spotlight for Private Equity fund managers. Consequently, we have experienced a significant increase in demand for FX management from Luxembourg domiciled-based PE funds over the last two years.

Due to the substantial size of the PE market in Luxembourg, managing FX related risks is crucial. If a PE fund manager’s investment strategy is to invest outside of the base currency of the fund, as a minimum, investors require them to demonstrate that they have thought about FX strategy and give them the option to manage FX risk over the life of the fund. Ultimately, FX considerations come down to whether macroeconomic exposure is a factor in the investment decision.

Additionally, there are four elements for PE managers and investors to consider regarding FX exposure. First, the initial exposure in the form of a commitment and the subsequent currency element of an investment. Second, the translational value of the investment. Third, the yield generated by the investment. Fourth; the exit and distributions that occur as a result. There are multiple points where these four exposures may arise depending on the asset class the fund is investing in. At portfolio level, a firm that is trading in currencies outside the fund’s base currency creates an FX exposure for the fund itself from the outset. Funds that run share classes in different currencies to the base currency are also exposed to risk.

It is paramount in this constantly shifting and challenging environment that managers have a robust fx policy in place.

Daniel Jack,  Senior Trader,  Monex Europe S.A.

A hedging strategy should include a blend of products that are dynamic and flexible, therefore reducing the risk of FX having a negative impact on the investment. A strategy should give a manager protection by reducing the risk of FX negatively impacting the fund’s performance.

We anticipate a substantial increase in proactive and dynamic FX management solutions to be implemented on a more widespread basis in the PE industry as a whole, over the coming years. In an era of rising interest rates, rising inflation and heightened geopolitical risks, it is paramount in this constantly shifting and challenging environment that managers have a robust FX policy in the place, and a partner like Monex that is able to tailor that to their individual needs. All of this ultimately helps managers protect investors from non-core investment risk, delivers greater capital efficiency and can help protect yields.

Partnering with an FX specialist, such as Monex, can allow managers to meet the expectations of investors from a regulatory perspective, a prudential capital perspective and a reputational perspective. Monex’s position in Luxembourg, and its relationships with other service providers (fund administrators, etc.), means we are able to provide seamless integration into existing processes, and also remove the administrative burden meaning fund managers have the freedom to get on with the job in hand.

This promotional article was written by Monex Europe S.A. as part of the company’s membership with the Paperjam + Delano Business Club. If you wish to become a member of the Club, contact us at .