Private Equity Fund


Background: 

Our client, one of the world’s largest private equity fund-of-funds managers, was concerned about the potential implications of FX volatility on their ability to finance future cash calls. As the majority of their future calls would be denominated in USD and EUR, and their financing facilities were predominantly denominated in GBP, any depreciation in GBP against either the EUR or the USD would result in a lower amount of financing available. Our mandate was to examine the potential impact of FX volatility on the firm’s ability to meet its future cash calls, whilst ensuring that any solution did not have material adverse effects on fund NAV or fund cash flow.

 

Our Approach: 

Following a meeting with firm’s partners to ensure we had a clear understanding of the risk management objectives and priorities (which related to funding capacity, loan covenants, and fund NAV), we modelled the funds FX risk exposures under different scenarios (relating to calls and distributions). Our initial objective was to determine the approximate probability of a funding shortfall resulting from FX volatility alone. 

As this analysis showed that, under certain call / distribution scenarios, the potential for FX volatility to create a funding shortfall was material, we then began to examine alternative approaches to reduce this risk, including different funding methods, in addition to external hedging solutions. A key constraint to consider in this analysis was the potential cash flow implications relating to margin calls which might arise as a result of implementing a financial hedging strategy. As such, our analysis looked to highlight a number of key issues including: 

 

 

 

The Result: 

This analysis was presented to the Board of Directors, and provided them with the required information to make an informed decision on the most appropriate hedging strategy for the fund. Despite the complexity of the risks involved (and the fact that hedging FX risk had a direct impact on liquidity risk), the depth and completeness of the analysis ensured that the Board of Directors was comfortable that the hedging solution would meet their original hedging objective (i.e. to prevent funding shortfalls), without resulting in additional problems relating to cash flow, loan covenants or NAV in subsequent years.







 

White Papers


 

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FX Risk

 

“Validus designed an innovative and practical hedging strategy to address our underlying FX risk in the context of very distinct and diverse sources of competition. We are delighted with the outcome and impressed with their on-going response to the changing business and market dynamics”.

 

Paul Stobbs, Managing Director, Attraction World

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Private Equity

 

 “The Validus team understand how private equity thinks about financial risk management issues and they are rigorous in the way they help our portfolio companies to understand and mitigate their risks.”

 

James Markham, Partner – Portfolio Management, Graphite Capital LLP

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FX and Commodity Risk

 

“Validus provides us with independent strategic advice relating to our long-term currency and commodity risk management program.  The people are extremely capable and collaborate very well with our finance and operations teams here at JD Irving.”

 

Mark Bettle, Director, J.D. Irving Ltd.

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FX  Risk

 

 “Validus developed a tailored hedging solution to mitigate the risks from our unique combination of existing supplier agreements. The implementation and management of this rolling hedging programme with our FX service providers has been expertly and efficiently handled”.  

 

Mark Goldby, Finance Director, SMS Electronics Ltd.

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Commodity Risk

 

“Validus worked with us to develop a comprehensive commodity risk management programme – their analysis was both insightful and actionable.   We particularly value their independence, and they continue to work alongside our internal team to ensure our commodity price risks are managed effectively”


Gerry Gray, Finance Director, Strix Ltd.


Testimonial

FX, Commodity & Interest Rate Risk

 

“Validus comes up with risk management solutions that are innovative and comprehensive but practical to implement, that is their strength compared to other consulting companies we have worked with in the past.  Validus provided valuable insights into how FX, interest rate and commodity risks impact our organisation, and provide actionable recommendations and solutions.”

 

Andrew Ayres, Finance Director, U-POL Ltd.

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