Demystifying your foreign currency transactions
Assessing your transactions could improve profits
Many private equity businesses are directly or indirectly exposed to foreign currency transactions. From manufacturers sourcing raw materials overseas, to foreign operation locations, international sales operations and foreign limited partnerships contributing to the portfolio or fund, you may not overtly realize portions of your businesses are international, but they are, and there are important currency exchange opportunities to consider.
If your businesses are operating internationally, in some way, shape or form you are conducting a wire or payment event that has your firm or your portfolio investment translating into or out of a foreign currency. Chances are your financial firm or bank, when conducting that transaction, is actually participating in the profit margin or spread on that trade, usually to the tune of 1 to 3 percent, or sometimes more, including additional fees and transaction costs, and you are not even aware of it.
How does this translate into actual costs? Here’s a real-life example: a client of ours, after we completed an assessment of their exchange transactions, discovered their bank collected 3 percent of the business’ annually transacted $20 million, meaning $600,000 of that currency actually went to the bank rather than to our client’s business. That’s a substantial bottom-line impact.
What can private equity firms, and their portfolio investments, do to address this challenge and demystify their foreign currency exposure to receive the best exchange deal possible?
The best way to identify a problem or opportunity is to quantify it. Understanding the true costs embedded within your currency payment and hedging activity is essential. In the clients we’ve assessed, over 80 percent of the time we’ve uncovered potential savings and additional value-added opportunities. Keep in mind, many firms erroneously focus on the fees charged for transactions, but these usually pale in comparison to the actual spread paid to the bank executing the transaction. This unseen spread can cost you hundreds to millions of dollars. A critical analysis shines a spotlight on those hidden costs to enable the creation of an actionable strategy, frequently for bottom-line impact. These real-client examples underscore the benefits of the analysis via bottom-line savings:
- A $160 million manufacturer with 10 to 18 foreign exchange purchases a month saved over $300,000 annually on transactions, while also benefiting from an ongoing hedging program and compliant, audit-ready, financial controls.
- A private equity fund assessed those of its portfolio investments with global operations and found it could generate average annual savings of $140,000 per operating company.
- A midsized mezzanine fund investing $30 million in a Canadian company found that it could save more than $200,000 annually by switching from its commercial bank, which typically charged them 75 basis points over the worst tradable rate of the day.
- A U.S.-based manufacturer, with operations in Mexico and a subsidiary in Germany, that processes 15 to 20 foreign exchange payments per month, was able to save more than $85,000 annually, while reducing volatility from future exchange rate movements.
To learn more about addressing your foreign exchange transaction improvement opportunities, contact us.
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Has your company ever incurred transaction fees, wire fees or expenses related to foreign currency transactions?