Investec Plc · LSE:INVP
Investec — Investor Presentation (November 2018)
41 slides from Investec's investor presentation, Nov 6, 2018
Slide 1: Hedging & Risk Management Masterclass
Hedging & Risk Management Masterclass 06 November 2018
Slide 2: Speaker biographies
John Rife, Partner, Debevoise & Haakon Blakstad, Partner, Validus Plimpton Haakon represents a leading John advises institutional and independent financial services firm independent sponsors of funds on a providing strategic advisory, outsourced broad range of matters, including fund hedging service
Slide 3: Currency risk management in the alternative investment industry
Currency risk management in the alternative investment industry Haakon Blakstad, Validus Risk Management 06 November 2018
Slide 4: Independent. Strategic. Practical.
Validus is a leading independent financial services firm, specialising in the alternative investment Independent. industry. Strategic. We provide strategic risk advisory, Practical. outsourced hedging services and fund finance solutions to LPs, GPs, and portfolio companies globally. 4 Validus Risk M
Slide 5: Currency Risk Management in the Alternative Investment Industry
Currency Risk Management in the Alternative Investment Industry Survey Respondents: • 69 funds managed by 42 managers representing $700 billion AUM • 67% in Europe, 36% in North America • Investment strategies include Private Equity, Private Debt, Real Estate, Infrastructure Main Findings: • Only 2%
Slide 6: The What, Why and How
The What, Why and How WHAT kind WHY do HOW do of FX risk funds funds are funds hedge? hedge? facing? • Funding risk • Risk • Swaps / management, Forwards • Investment risk protecting alpha • Direct • Options • Indirect • Competitive advantage • Other • LP requirements 6
Slide 7: Particular Considerations
Particular Considerations • Hedge ratios and tenors: Adjusting for uncertain future cash flows • Liquidity risk: How to avoid cash drag and/or unforeseen liquidity events • Counterparty risk: Do you have a robust hedging framework in place? • Best Execution: Not just about price 7
Slide 8: Questions?
Questions? 8 Validus Risk Management Limited is authorized and regulated by the Financial Conduct Authority in the UK. Firm Ref: 555972
Slide 9: Hedging: relationship with fund level financing and fund documentation
Hedging: relationship with fund level financing and fund documentation Thomas Smith & John Rife, Debevoise & Plimpton 06 November 2018
Slide 10: Legal Structuring Aspects – Where to hedge within structure
Legal Structuring Aspects – Where to hedge within structure • Fund level within facility – Hedging limited to credit facility lenders – Uses up capacity under facility – Consider cap arrangements – Alternatives: » Drawing under the facility in multi currencies as embedded hedge » Redenomination • Fu
Slide 11: Legal Structuring Aspects – Where to hedge within structure
Legal Structuring Aspects – Where to hedge within structure • SPV hedging – Credit support – Other issues (e.g. German tax) – Relationship with subscription line financing • Feeder hedging – Credit support – Relationship with subscription line financing 12
Slide 12: Legal Structuring Aspects – Fund Documentation
Legal Structuring Aspects – Fund Documentation • Restriction on hedging / derivatives • Restriction on indebtedness at fund level – Contingent liabilities – ILPA guidelines • Diverging LP demands • AIFMD considerations 13
Slide 13: Hedging for funds
Hedging for funds Joe McKenna, Investec Fund Solutions 06 November 2018
Slide 14: Hedging & Risk Management Masterclass | 15
Hedging & Risk Management Masterclass | 15
Slide 15: Source: Bloomberg, September 2018
Source: Bloomberg, September 2018 Hedging & Risk Management Masterclass | 16
Slide 16: Source: Bloomberg, September 2018
Source: Bloomberg, September 2018 Hedging & Risk Management Masterclass | 17
Slide 17: Source: Bloomberg, September 2018
Source: Bloomberg, September 2018 Hedging & Risk Management Masterclass | 18
Slide 18: Why do funds hedge?
Investec Fund Solutions Why do funds hedge? EUR/USD YoY % Change 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% -40.00% 31/08/2000 31/08/2001 31/08/2002 31/08/2003 31/08/2004 31/08/2005 31/08/2006 31/08/2007 31/08/2008 31/08/2009 31/08/2010 31/08/2011 31/08/2012 31/08/2013 31/08/2014 31/08/2015
Slide 19: Mark-to-Market
Mark-to-Market - an accounting practice that involves recording the value of an asset to reflect its current market levels OR what are my current gains or losses if I was to sell my contract today? Hedging & Risk Management Masterclass | 20
Slide 20: What is our potential exposure?
What is our potential exposure? • MtM evolves over time as market prices evolve • Potential future credit exposure can be significantly larger than current exposure • Focusing on current exposure is great, but it doesn’t give the foresight needed to approve adequate limits today for what may happen
Slide 21: What is PFE and EPE?
What is PFE (Potential Future Exposure) and EPE (Expected Potential Exposure)? • PFE is a simple representation of how much credit exposure a • EPE represents the average of out-of-the-money scenarios. i.e. if a derivative trade might create trade goes out of the money for a client, how far would th
Slide 22: Forward contract EPE & PFE
Forward contract EPE & PFE Emergence of Potential Exposure 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 EPE PFE95 Hedging & Risk Management Masterclass | 23
Slide 23: What size credit threshold can we offer?
What size credit threshold can we offer? Large manager, hedging your flagship fund with lots of undrawn capital? The market can typically offer an unsecured credit threshold that is 2%-3% of the fund size BUT, what if… • This is a late life fund? An SMA? A more difficult situation? • This 2 to 3% is
Slide 24: Basic Foreign Exchange Instruments
Basic Foreign Exchange Instruments • Spot - exchange of one currency for another currency T T+1 T+2 Business days - immediate delivery (by market convention, T+2) Trade Settlement (Transaction (Delivery date) date) • Forward Forward Forward Spot Forward Forward - exchange of one currency for another
Slide 25: Tools available
Investec Fund Solutions Tools available Spot – high FX risk, full benefit if the rate moves in your favour Forwards (& Swaps) – no FX risk, opportunity cost if spot moves in your favour Vanilla Option – no FX risk, full benefit if rate moves in your favour, BUT the client pays a premium for the bene
Slide 26: Other FX Products
Other FX Products Participation Spot Vanilla Outperformance Hedge Structured Solutions Outperformance Hedge Forwards Protection Hedging & Risk Management Masterclass | 27
Slide 27: Hedging & Risk Management Masterclass | 28
Hedging & Risk Management Masterclass | 28
Slide 28: Why is a forward price different to a spot price?
Why is a forward price different to a spot price? Assume that Andy can buy USD 10 from Anish today in exchange for GBP 5 What circumstances would need to apply in order to enable Andy to be able to agree today to buy the same USD 10 from Anish for GBP 5 in one year’s time? Demand from USD investors/
Slide 29: Interest Rate Differentials and (no?) arbitrage
Interest Rate Differentials and (no?) arbitrage Why are interest rates so important? The ECON 101 version Andy has GBP 5 Anish has USD 10 “Spot” rate 2.00 Happy to trade Andy could leave Anish could this in a bank leave this in a account and bank account earn interest and earn interest BoE Fed pays
Slide 30: What is the 'currency-basis'?
What is the ‘currency-basis’? Why was the previous slide incomplete? Demand from USD investors for Andy’s credit The Econ 101 explanation of FX forwards GBP delivered in a year worthiness Demand from ignores another important Econ 101 lesson… GBP investors for USD delivered in a year Anish’s credit
Slide 31: What moves the currency-basis?
Currency Swaps & FX Forwards What moves the “currency-basis” ? • Supply and demand. Why should currency be any different from any other asset class? Sovereign Normalisation Ratio of Fed to ECB Relative stability – Credit crunch – debt crisis – driven by balance sheet ample liquidity in EUR massive d
Slide 32: How do we price trades?
How do we price trades? • The table below provides one example of the typical input to pricing a forward contract – buying GBP and selling EUR 1 year forward with indicative credit charges at 30 basis points per annum. • In the following slide we touch on the basic inputs which we might see in a ban
Slide 33: A brief look at XVA's
A brief look at XVA’s Credit Valuation Adjustment or CVA • CVA represents the expected loss on a trade – it is a reserve we hold against a trade defaulting. • Modelled on the basis of tracking the EPE path Funding Valuation Adjustment or FVA • FVA represents the expected cost of funding the cash flo
Slide 34: Hedging & Risk Management Masterclass | 35
Hedging & Risk Management Masterclass | 35
Slide 35: Historic Rate Rolls
Investec Fund Solutions Historic Rate Rolls When a maturity date is reached on a hedging contract, if clients wish to delay FX delivery they can roll the position to a new future date, typically using an FX swap (see appendix). The difference between the initial hedge FX rate and the new FX swap rat
Slide 36: Sequoia case study
As a specialist in our sector, our relationship manager has always understood our business, and its evolving needs – despite the fact that we are a unique business. Dolf Kohnhorst, Director Who we are worked with Investec for hedging credit, which enables us to keep it major currencies – the fund’s
Slide 37: Cain International case study
“ extremely proactive Investec have alwaysbeen in helping usfind working solutions ” to manage our currency risks Peter Groundwater, Finance Director Who weare Investec’ssolution Outcome Cain International is a real-estate development As with any large complex project, challenges The above is just o
Slide 38: Beechbrook Capital case study
The Investec Fund Solutions team has taken a genuine interest in the growth of our relatively small business. Alan Chu, Finance and Operations Director Who we are Investec’s solution Outcome Beechbrook Capital is a specialist Our Investec Fund Solutions Investec Fund Solutions’ proactivity fund mana
Slide 39: Disclaimer
Disclaimer This document is issued in the UK by Investec Bank plc (“Investec”), which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Whilst all reasonable care has been taken to ensure that the informatio
Slide 40: Meet the Fund Solutions team
Meet the Fund Solutions team Joe McKenna Michael Slane Devonshi Mody Seb Wright +44 207 597 4645 +44 207 597 3684 +44 207 597 5341 +44 207 597 5543 joseph.mckenna@investec.co.uk michael.slane@Investec.co.uk devonshi.mody@investec.co.uk seb.wright@investec.co.uk Fund Solutions Specialist currency and
Slide 41: Closing & questions
Closing & questions 06 November 2018