Foreign Exchange Risk

Alternative Credit Capacity

for Fund-Level Hedging Programs

HedgeNAV provides credit capacity to equity funds when their currency exposure is highest but their access to stand-by liquidity is lowest, often in concert with a wider Fund Finance transaction such as a NAV Facility

HedgeNAV serves

a small, but growing, niche

Implementing credit solutions for the long-term FX hedging needs of investors with concentrated and mature portfolios of private equity or real estate assets, with a focus on those with NAV-based credit facilities in place or pending

HedgeNAV blends

innovation and collaboration

Partnering with these investors and their NAV-based lenders to design and implement FX hedging programs that are fully funded by a new tranche of the NAV Facility, with no need for security sharing with the investors' hedging banks

HedgeNAV benefits

multiple stakeholders

Enabling robust currency risk management during the period surrounding a fund's peak NAV, when its financial performance is most sensitive to FX risk, by a means that also improves the risk-return profile for its lenders

HedgeNAV contributes its expertise and capital, investing alongside NAV Facility providers and any co-investors as a minority lender and administrator during the term

FX Hedge NAV Facilities are:

An optional tranche of an existing long-term portfolio financing

Like the main NAV Facility, secured by priority over distributions made by the fund, not LP capital commitments
Capitalized and administered as a joint venture between HedgeNAV and the main NAV Facility provider(s)
With unlimited sub-tranches matching investment-specific hedges within an approved hedging program
At least ranking alongside and on the same terms as main NAV Facility except any hedging-specific pricing schedules, capacity commitments, usage restrictions and supplemental covenants
Documented in a simpler, more user-friendly format than derivatives credit line packages under ISDA

Supporting an investment portfolio's currency hedging needs

Each facility is sized to meet the portfolio's specific hedging needs, typically in terms of % of prevailing NAV
Extends an existing fund-level hedging program or establishes a new one, with any hedging banks desired
Is flexible enough to absorbs all hedging program expenses, such as
- funding mark-to-market of existing program at transition, as applicable
- funding up-front option premium amounts, as applicable
- funding ISDA CSA Independent Amounts, and Variation Margin payments, as applicable
- funding any fees and accrued interest associated with the credit facility
With repayments normally occurring only in conjunction with asset sales or other fund-level distributions

When it matters most

Surrounding the period of peak NAV, when equity value at risk to adverse currency movements on the portfolio's international investments is highest
Permits a transition from multiple fund-level unsecured creditors during a fund's Investment Phase to a simpler, single creditor group during its Harvesting Phase

Maximizing investable capital, minimizing liquidity and regulatory risk

Permits full deployment of capital on investments rather than as a "liquidity buffer" to satisfy hedging banks' Minimum Liquidity requirements or to fund any maturing hedge settlements
Permits increased certainty by pre-agreeing terms to "roll" any Close-Out Amounts for any maturing hedges
Reduces complexity and chance of unexpected cash events, with the fund subject to a single set of credit provisions documented in one place, with regular bilateral reviews
Supports all derivative transaction types irrespective of entity status without derivatives regulation legal work-arounds such as "HedgeCo" entity structures for the main fund or any sub-funds, if applicable

In a way that also benefits the lenders of the main NAV Facility

Lowers risk of NAV erosion due purely to foreign exchange movements
Increases margin revenue with near-negligible increase to LTV
Leverages existing diligence and credit underwriting investment
Obviates the need to share security with third parties such as hedging banks
Provides means for borrower to hedge interest rate or commodity risk at fund level should it be warranted

Why HedgeNAV is against "Minimum Liquidity"

Minimum Liquidity requirements do not feature in Hedge NAV Facilities. These provisions are prevalent in banks' ISDA documentation for fund-level credit lines because they enable the bank to terminate all of its hedging transactions if the fund's callable capital (plus any cash or equivalents on balance sheet) drops below their specified level. For any hedges with this bank that are liabilities at the time, an unwelcome cash event befalls the fund. As all ISDA terms can differ between a fund's bank group, so can the presence, level and specific terms of any required Minimum Liquidity.

Minimum Liquidity requirements do serve a genuine purpose; some funds would be unable to get any hedging credit capacity from banks without them. But their main effect is to deny funds with active hedging programs the ability to fully deploy their capital commitments on investments without also accepting substantial liquidity risk.

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