Protecting deal economics between signing and closing: case study

 

Overview

Managing FX risk on cross-border investments

For private equity funds, the period between signing and closing can create material FX risk. When an investment is agreed in one currency but capital is called in another, market movements can change the effective cost of the deal before completion.

Marex supported a private equity client by implementing a simple, uncollateralized FX hedge. This helped the fund protect its investment economics, avoid unnecessary capital call buffers and preserve liquidity.

 

Client challenges and FX exposure

Our client, a European mid-market private equity firm, had signed an agreement to acquire a US-based company.

The acquisition was payable in US dollars, while the fund’s capital call would be made in euros. Completion was expected several weeks after signing, leaving the client exposed to movements in EUR/USD before the capital call proceeds were received and converted.

Without a hedge, the client faced three key risks:

• the euro cost of the acquisition could increase before closing

• the fund may need to call an FX buffer from investors

• if the market moved adversely, the client could be forced to return to investors for additional capital

The client needed more certainty over the FX rate without tying up cash during a live transaction process.

 

FX Strategy and proposed solution

Marex worked with the client’s deal and finance teams to identify the exposure, expected funding date and operational requirements.

A forward contract was executed shortly after signing, locking in the EUR/USD rate for the expected closing date.

Crucially, Marex provided the hedge on an uncollateralized basis. This meant the client did not need to post cash margin or fund a potential margin call.

By locking in the rate before issuing capital call notices, the client could calculate the required euro amount with greater confidence and avoid building in an unnecessary FX buffer.

 

Results and outcomes

Certainty at a critical point 

The hedge gave the client more certainty at a critical point in the transaction.

The client was able to:

• protect the agreed deal economics

• lock in the EUR/USD rate before closing

• avoid tying up cash collateral

• avoid over-calling capital from investors

• reduce the risk of having to issue a follow-on capital call

• complete the acquisition with the required US dollars available on settlement

For the client, the value was straightforward: they could move from signing to closing with a clear FX position, a known capital call amount and no collateral drag on liquidity.