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Currency risk remains a challenge for PE investors

Anna Lyudvig
May 9, 2022, 9:13 a.m.

Word count: 529

Currency risk can be a major challenge when investing in Africa, according to the ‘Currency Risk Management Practices in African Private Equity and Venture Capital’ Report, the second AVCA’s special report series alongside The Currency Exchange Fund (TCX) and MFX Solutions.

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Currency risk can be a major challenge when investing in Africa, according to the ‘Currency Risk Management Practices in African Private Equity and Venture Capital’ Report, the second AVCA’s special report series alongside The Currency Exchange Fund (TCX) and MFX Solutions.

The report revealed that 64% of LPs and 86% of GPs surveyed perceived currency risk as important or very important when investing in African private equity.

In addition, although currency risk is present throughout the investment process, it was most impactful for both fund managers and LPs at the time of portfolio exit.

Abi Mustapha- Maduakor, CEO of the African Private Equity and Venture Capital Association (AVCA), said: "We welcome the continued increased interest in private capital in Africa, although it is key, we address the growing concerns related to currency illiquidity and volatility as they remain significant barriers to growth across the continent. With the ever-increasing innovation across the continent, it is paramount that private capital partners are well-versed on addressing currency risk."

The report provides data and insights on the strategies for currency risk management and hedging practices, the challenges accompanying currency risk management in African Private Equity and Venture Capital and how limited and general partners operating in Africa can successfully address currency risk on the continent and manage their FX exposure whilst capturing the opportunities in the African private equity and venture capital industry.

The report identified that foreign exchange volatility and foreign currency shortages remain some of the biggest challenges facing private equity investors in Africa.

The report also found that over half of LPs and GPs confirmed that currency risk has slightly or significantly increased in the last 2-4 years, making it a significant challenge for private capital.

The survey correspondents also highlighted the challenges related to the mitigation of currency risk in Africa, with 94% of participating GPs citing the high cost of hedging facilities as the main factor constraining adoption.

Africa’s economic performance, the macroeconomic instability caused by the COVID-19 pandemic, and the overall level of political stability within African countries were identified as the main contributors behind the increasing currency volatility in Africa by the largest proportions of both GP and LP respondents.

Natural hedges such as portfolio diversification across different sectors and geographies were chosen by the largest proportion of investors as their preferred strategy for managing currency risk in Africa.

From the LP perspective, over half that participated in the survey required a comprehensive FX scenario analysis when onboarding an African fund manager, although over a third also report not having any specific requirements related to the management of currency risk.

With Africa’s continuously expanding innovation ecosystem, and investor interest rising, the demand for timely, reliable and competitively-priced sourcing of currency will only intensify, as will the demand for contextually relevant currency risk management strategies and sophisticated hedging products catered to the unique needs of African fund managers.

Mustapha- Maduakor added: ”This joint publication exemplifies AVCA’s commitment to equipping stakeholders within our industry with valuable insights to support the investment ecosystem in Africa. We thank TCX and MFX for their contribution to this report and the fund managers, and limited partners for their involvement in the survey."

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