While FX risk management is always important for cross-border acquisitions, it is critical when it comes to the take-private of public companies.
Looking at the last quarter’s political headlines, you may have expected dealmakers to want to hunker down for the summer and wait for a few storm clouds to pass. As it turned out, it was another record-breaking quarter for private equity transactions. From our perspective as hedge advisors, currency risk has been at the forefront of our clients’ minds.
One driver for this has been the increased number of public-to-private transactions, with takeovers of listed companies accounting for 21% of total deal value compared to 16% over the same period last year. The UK market has been particularly active and it is reasonable to assume that sterling’s prolonged weakness may have played a role here. As a result, a number of our mandates in the last three months revolved around managing financial risk in the context of public-to-private deals, with a particular focus on currency risk between announcement and completion.
While FX risk management is always important for cross-border acquisitions, it is critical when it comes to the take-private of public companies. This is because bidders have to provide an assurance that they have sufficient unconditional funding available to complete the acquisition. In order to prevent adverse FX movements from requiring additional funds to be called upon to complete a take-private, sponsors usually enter into Deal-Contingent (DC) hedges to eliminate any currency risk between the announcement and completion of the deal.
We were delighted to support a number of different sponsors with arranging such hedging, which gave us excellent insight into this segment of the market. While DC hedging for private-to-private transactions is well established with good appetite from a number of providers, banks tend to be much more selective when it comes to public-to-private deals. Understanding the capabilities of major players to deliver on these types of mandates is therefore crucial.
The second major theme of the past three months has been our increased involvement pre-closing in order to scrutinise the currency risks inherent in a potential target. We help our clients understand how FX movements could affect the equity story of the investment and outline potential risk mitigation strategies at both portfolio and the fund level. While there is no “silver bullet” that can eliminate all FX exposure, understanding exactly how currency developments can drive performance is nonetheless key to assess the investment. As GBP has now dropped below 1.25 vs. the Dollar and has fallen to 1.11 vs. the Euro, assets which are “short sterling” and “long USD/EUR” look even more attractive than they did just a few months ago. An awareness of how a reversal of these FX movements could hamper returns should be a major aspect of the diligence process.
For more information, please contact Moritz Sterzinger, Director, Private Equity at JCRA: firstname.lastname@example.org.