UK:
Brexit – What Can Private Equity Funds Do To Hedge Against Sterling Risk?
14 July 2016
Reed Smith (Worldwide)
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We have seen a dramatic increase in interest in hedging FX risk
related to investments by private equity funds.
The precipitous decline in the value of sterling has caused
complications for funds which are in the process of acquiring UK
assets. For deals which are still going ahead, many sponsors are
using or considering deal contingent FX hedges to protect them
against further fluctuations. These products are offered by a small
number of banks to funds which are buying or selling assets
denominated in a different currency to their base currency.
They allow the fund to enter into an FX forward which will only
settle if the sale goes ahead (for example, when the conditions
precedent to completion such as competition clearance are
satisfied). The forward agreement includes a schedule of settlement
dates with FX rates which gradually move against the fund depending
on when settlement actually occurs. They are, in a sense, options
without a premium which are contingent on completion.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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