Private equity investors are increasingly worried about currency fluctuations and the impact on returns, especially firms with dollar-denominated funds that invest in European assets.
Secondaries participants are no exception, with firms including asset managers HarbourVest Partners, AlpInvest Partners, Partners Group and direct secondaries firm Azini Capital citing foreign exchange volatility as a concern in recent months.
The euro has weakened about 13 percent against the dollar in the last year, while the pound has also been quite volatile.
HarbourVest Global Private Equity (HVPE), the Boston-based firm’s listed fund of funds vehicle, said in a monthly update report on Thursday that foreign currency movements had contributed to its unfunded commitments of $933 million falling on a net basis by $14.5 million in August. HarbourVest does not actively use derivatives or other products to hedge against currency exposure, according to a spokesman for the firm.
Amsterdam-based AlpInvest shaved almost $4 billion off its assets under management (AUM) between September 2014 and March this year, with a spokeswoman for the firm citing currency fluctuations as one of the reason for the drop. The spokeswoman was not immediately able to comment on whether AlpInvest, which had $45.3 billion in AUM as of 31 March, uses products to guard against currency volatility.
“If you’re a dollar fund and all your investments are euro-denominated, you’re going to take a massive hit on return if the euro drops 20 percent against the dollar,” said Gregg Kantor, who structures debt financing deals for private equity funds at Investec in London. “Even if you might make fantastic money and fantastic investments, you’ve just knocked off a huge amount of value.”
It’s not just dollar-denominated funds that are being impacted. Earlier this year, Partners Group, which is based in Zug, Switzerland, noted that the significant strengthening of the Swiss franc against other currencies after the Swiss National Bank lifted a currency cap in January 2015 was expected to negatively affect the firm’s EBITDA margin on its existing business. Partners Group uses derivatives to hedge its exposure to foreign exchange risks arising from financing and investment activities.
Foreign exchange volatility is also a concern for direct secondaries firms such as Azini Capital, which look to sell European investments to US buyers.
“Currencies are swinging around quite a lot at the moment and that can have a really big impact, not just in terms of price paid for companies but what impact are currencies having on a company’s revenue and profitability,” said Nick Habgood, managing partner at Azini in London. Azini, which denominates its funds in dollars, tries to insulate itself against fluctuations by buying in dollars and selling in dollars.
In July, Partners Group said in an earnings conference call that more and more large global mandates were asking for denominations in their respective local currencies to insulate themselves from volatility.