Structuring multi-currency offerings for private credit funds – key challenges and how to overcome them

Multi-currency structures are becoming more prevalent in Europe, particularly among private credit fund managers.

Used to facilitate investment, support global operations, manage currency risk and provide investor flexibility, multi-currency structures can give managers an edge over competitors by widening a fund’s appeal to end investors. However, while they are an increasingly popular option for managers, they can increase complexity and present several operational hurdles for in-house teams.

There are a range of fund structures available when it comes to facilitating multi-currency investment, but common ones include parallel currency feeders paying into a master fund, parallel funds with different currencies, or currency feeder funds.

The Citco group of companies (Citco), alongside legal experts Dechert and alternative asset management platform Hayfin, discussed these structures at a recent event in London, identifying several core challenges and considerations around them, focusing on some key investor elements for closed ended funds.

6 key challenges when administering multi-currency offerings

1. Calculating share percentages for drawdowns: Complex calculations are required to determine accurate shares across multiple currency classes, considering exchange rate fluctuations and timing differences.
2. Hedging: Teams face operational complexity in maintaining appropriate hedge levels while considering cost implications and allocation, counterparty risk, and the timing of capital calls and distributions.
3. Returns profile, management fees and carried interest: Having a different base currency to that of each class/parallel/feeder can cause additional operational burdens, and FX considerations must also be incorporated into fee calculation clauses.
4. Equalisation: Balancing investor contributions across different currencies requires complex equalisation calculations to ensure fair treatment of all investors.
5. Variance in capital called rates and end of term liquidity: Different currency classes may experience varying capital call rates due to FX movements, creating challenges in maintaining balanced investment exposure.
6. Voting: Calculating voting rights across multiple currency classes requires careful consideration of exchange rates and timing.

Overcoming multi-currency complexity

Successful multi-currency portfolio management which overcomes the above challenges requires an advanced technology platform that automates the capture and processing of FX data, combined with expert service teams who can validate operations and detect anomalies. 

Technology platforms must be able to handle granular-level information processing to ensure accurate valuation and allocation methodologies across all currency exposures. A key differentiator is the ability to marry investor-level data with fund-level accounting and P&L information. While funds typically excel at tracking aggregate portfolio metrics, the integration of investor-specific allocations with FX gains/losses and hedging activities requires specialized expertise and systematic processes to maintain accuracy.

Combining all these elements together can ensure a smooth end-to-end process for managers which delivers accurate and timely information to end investors, regardless of what currency tranche they are in.