PE Question: Currency volatility and USD PE in non-USD portfolios
I am indeed seeking views from experienced PE veterans on how currency risk can be managed for a USD PE fund investing in non-USD assets, say having revenues and cashflows in EUR/SGD/IDR. I understand that theoretically, PE can hedge at fund/portfolio level, but I am wondering whether FX hedging for PE is really practical given the uncertain nature of cashflows.
Any other ways for PE to manage FX risk in the real world?
Bunp
You are correct when you say that the nature of cash flows and market value fluctuations make it very hard to hedge this type of investment. Most funds that I know just take the FX risk.
The fund where I worked before (growth equity, $40Bn+ in AuM) did not hedge their FX exposure. They saw the investment in a company in China, Brazil, India, etc. also as an investment in the country and in the currency - so they had to take a view there as well. Since they had enough geographic diversification, they could deal with some volatility in the short-term.
The fund I work for now (SWF, $500Bn+ in AuM) might or might not hedge their private investments exposure. This is a top of the house decision and is taken considering the whole portfolio, which also include public equities, bonds, futures, etc.
PEs don't typically hedge currency exposure though some will include a certain rate of local ccy depreciation in their underwriting. The idea is that there should be sufficient "base case return" to provide a margin safety in case there's an adverse move in fx.
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