How family offices and institutional LPs differ on exchange risk

Larger investors are almost twice as likely to underweight India than family offices, and both groups are wary of Turkey and Russia, according to research by Montana Capital Partners.

New research has revealed the regional markets that family offices and institutional investors are most likely to underweight due to exchange rate risk.

More than one-quarter of family offices or foundations are likely to underweight the UK, compared with just 14 percent of institutional investors, according to the Annual Investor Survey 2018 from Montana Capital Partners. Almost 10 percent of family offices could shy away from the US, while only 4 percent of institutions said the same.

India proved the most controversial market for the two investor types. Almost two-fifths of institutions are likely to underweight to the region, a view shared by only 20 percent of families.

“The theory is not to look at currency but to identify top performing firms and work with those firms, but when investors leave the US dollar and the euro, they want a premium in the performance of the private equity firm,” Mounir Guen, founder and chief executive of placement agency MVision Private Equity Advisors, told Private Equity International.

“In some vintages they’re quite surprised when they bring the numbers back to net US dollar returns versus local currency and how much their returns have been eroded by currency volatility.”

Institutional LPs are also more bearish on Turkey; 64 percent will likely underweight the market compared with 51 percent of family offices. Half of institutional LPs and 43 percent of family offices have the same view of Russia.

“Institutions have fiduciary liabilities that they’re obligated to cover and their model has to run at a structured risk free rate of return relative to the exposures they’ve put together,” Guen added. “Family groups don’t have that and are a lot more flexible.”

The secondaries firm surveyed 108 investors, of which 30 percent were single family offices. Insurance companies accounted for 21 percent of respondents and pension funds comprised an additional 15 percent. European investors accounted for 60 percent, excluding Switzerland, with the latter accounting for 20 percent of responses.