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Identifying and managing risks for Private Equity Funds was the topic explored at a recent Barclays Wealth and Investment Management breakfast seminar.
Identifying and managing risks for Private Equity Funds was the topic explored at a recent Barclays Wealth and Investment Management breakfast seminar.
Local non-executive directors and fund administrators were given a presentation on how fund boards can identify and mitigate the risks of foreign exchange and interest rates by risk management experts Graham Sheridan, Andy Brock and Stephane Carrier from the Barclays Risk Solutions Group.
The presentation, hosted by Steve Rickards and Angus Findlay of Barclays’ Guernsey fund team, explored how boards can manage risk and reduce costs within the current market conditions. The past, current and future market expectations were reviewed and attendees were given an insight into currency and interest rates risks and a range of possible market solutions.
“Risk management is an increasing challenge for Fund boards,” said Graham Sheridan.
“FX hedging has previously been quite low on board agendas but with the focus on AIFMD and the process of documenting decisions on risk issues there has been increasing attention on hedging and how this can improve fund returns.”
When to hedge was discussed including systematic, opportunistic and defensive hedging and the use of the metric ‘purchasing power parity’ (PPP) by funds when making their hedging decisions was reviewed.
Interest rate hedging was also explored in conjunction with the results of Barclays’ Annual Finance and Risk Management Conference survey.
Survey questions including the risks to the global economy over the next 12 months and predictions of where the 10 year interest rates will be in 12 months were reviewed and the results were analysed.
“The market is notoriously bad at predicting the path of future interest rates,” said Stephane Carrier.
“When rates are falling, the market expects them to fall by less than they actually do and when rates are rising, they tend to rise by more than what the market expects. The key is knowing where we are in the cycle.”
When to hedge during the acquisition process and the use of deal contingent hedging for both FX and interest rate hedging was also explored.
“There are a number of points during the acquisition process including first and second round bids when you could argue that currency risk begins,” explained Mr Carrier.
“Deal contingent hedging is widely used as a solution to ensure any risks around currency and interest rate exposures are mitigated. It includes a cancellation feature so if the acquisition does not close then there is no hedge liability and no deal breakage costs.”
PICTURED L-R: Andy Brock, Graham Sheridan and Stephane Carrier
