Over the past 12 years of my career, I’ve seen countless businesses fall prey to the hazards of foreign exchange (FX) trading.
Private equity (PE) and venture capital (VC) businesses are some of the most affected. Managing a portfolio of businesses means that risk, excess fees and poor exchange rates have a compounding effect.
Here, I'm going to walk you through what I've learned about efficient FX private equity management, and how you can improve your margins today using Just’s FX Analytics.
How FX affects the performance of PE and VC firms
The impact of FX costs on portfolio companies is underestimated and undoubtedly large. If improperly managed, FX costs can:
- Lead to reduced investment returns.
- Increase currency risk.
- Allow hidden costs to pass under the radar.
- Make valuing portfolio companies more difficult.
- Reduce investor confidence.
The size and scope of private equity and venture capital portfolios make all of this harder to manage.
The Central Challenge to Controlling Portfolio FX Costs
Over-the-counter financial markets like FX are obscure. This tips the balance of power in favour of the party that has the most information. Banks and FX providers are often the only ones who have access to live market data, which gives them the liberty to tell businesses what they should and shouldn’t expect. Unsurprisingly, this leads to unfair outcomes.
It is not uncommon for the FX margin to differ up to 25 times for two identical companies, with one having access to market data and the other not.
Businesses with small treasury teams and limited resources are more vulnerable to unfair premiums set by their FX providers. These providers can identify which businesses don’t have access to market data and subsequently won’t be aware of their options when it comes to negotiating FX costs.
In order to achieve fairer margins, businesses need access to the information possessed by their FX providers.
Proven FX Management Strategies
So, what can PE and VC treasury teams do to counter such a challenge?
Fundamentally, the solution is about gathering accurate and detailed information and then using that data to negotiate fair margins. Here are four critical tips for success:
- Establish relationships: Portfolio companies need to build direct relationships with their provider’s FX desk. This gives them more competitive margins than going through the international payments team of their domestic bank. Moreover, they will be able to ask questions about FX margins, which in itself signals that they are savvier and positions them for more even negotiations.
- Use multibank or auctioning platforms: If any of your portfolio companies are trading more than €350m annually you can access multibank auctioning platforms (also known as multi-dealer platforms or MDPs). These channels often provide fairer deals due to the inherent competition resulting from visibility into the deals across multiple providers. If you have access to this market, you should use it.
- Get access to data: Knowledge is power. Getting the right knowledge is even more powerful. While Yahoo Finance is often the go-to source for FX exchange rate data for many treasurers, this information doesn't include what corporate teams need in order to benchmark the margins on FX trades and hedges. The right analytics will:
- Inform companies of their margins.
- Help them understand what a good margin is for the pairs they trade.
- Tell them what margins other companies in the market are getting and identify which providers offer the best margins.
4. Negotiate: Once your companies have objective data, they have the leverage to ask for a fairer deal - or at least ask why they are being charged the way they are.
It’s also worth mentioning the power of cross-portfolio management to reduce FX risk and cost. Using the combined data from your entire portfolio will help you understand different FX margins in the market. You are also in a position to bundle the combined FX flow of your portfolio companies and approach a single FX provider, strengthening your ability to negotiate macro terms for the group.
The greater the flow, the greater the influence, but generally annual FX flow above 100M USD enables leverage in negotiating margins.
Support your portfolio with FX Analytics
The ability to ensure fair margins across your portfolio is only as strong as the information you have. We started Just to level the playing field between FX providers and businesses. To do this, we built FX Analytics, which provides:
- Access to the live market data that FX providers use that enables companies to check margins while they trade.
- A single platform accessible from any browser, with no setup required.
- Trading insights based on the historical margin analysis of a company's FX trades.
- Marketplace analysis that helps companies compare their margins to what other companies are getting and other providers are offering.
In addition, for you as a firm, FX Analytics supports your buy-side due diligence process by enabling you to discover excessive margins and hidden FX costs, which can be reduced to improve company value.
While not a trading platform, the unique data provided by FX Analytics can be fundamental in improving FX private equity strategies and best practices. Since launching FX Analytics, we’ve seen European and global businesses reduce their annual FX costs by an average of 50-60%.
Take back control with Just
It cannot be overstated how important it is to benchmark FX trades and understand the injustice of their costs.
Through SaaS platforms like FX Analytics, PE and VC companies can harness the data needed to drive more efficient FX initiatives across portfolio treasury teams.
It is Just’s mission to empower treasurers and financial professionals to take back control of their FX costs by bringing clarity to the obscurity of the FX market.
Get a demo and free trial for your portfolio companies today.
Anders is a serial fintech entrepreneur and thought leader who has spent the past 12 years at the intersection of capital markets and technology startups. He is currently the CEO and founder of Just Technologies, serving corporate treasurers by levelling the playing field for companies involved in global trade. You can connect with him on LinkedIn here.