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case study

US PRIVATE EQUITY FUND

Background

Private Equity fund with portfolio investments in Europe and North America

The company needed advice on their currency exposure and on a hedging strategy that achieved the following

  • Protected returns throughout the expected holding period of the investments prior to sale.
  • Retained the upside in the event that the USD depreciated, while at the same time limiting the hedging cost to
    reasonable levels
Speak to an expert

Brian Phelan

Director

E: Brian.Phelan@jcraus.com
T: +1 646 640 3618

Our approach

Analysed and discussed the foreign exchange exposures with the business.

Recommended the fund’s hedging objectives would benefit most from purchasing put spreads.

The tenor of the hedges were structured based on the revised expectations, thereby limiting any re-hedging cost.

Our approach

  • Recommended that the fund’s hedging objectives would benefit most from purchasing put spreads. This approach allowed the fund to structure the protection in a way that optimised the trade-off between hedging cost and protection purchased.
  • The use of these put spreads also avoided the need to go through long discussions regarding credit lines with the potential hedging banks, as no credit risk was created for the banks.

Benefits of our approach

  • Both hedging requirements were achieved and we:
    - Protected returns throughout the expected life of the asset prior to harvest.
    - Kept the hedging costs to reasonable levels. Structuring the put spreads over a prolonged period worked well as the hedging requirement minimised the client’s hedging costs and credit line usage.
  • Specifically:
    - The choice of the strike rates on the put spreads allowed the client to tailor the protection to the level that was needed
    - It avoided the higher cost of outright put options.
    - The flexibility to choose the level of protection allowed the fund to manage the upfront premiums in a way that provided a greater volume of protection than would otherwise be allowed.

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