Tracking Uncalled Capital for Foreign Denominated Investments with Solovis

EUR-USD Parity

In the summer of 2022, the value of the Euro dropped into parity with the US dollar for the first time in 20 years. For everyday Americans, the equilibrium meant that an August vacation to the French Riviera was marginally more affordable, but for European asset owners invested in US dollar-denominated funds, it meant a major headache for their cashflow planning.

Managing Cashflows

Keeping track of unfunded commitments to drawdown-style funds is no small feat. Unlike open-ended funds where asset owners allocate a vast majority of their investment amount up-front, drawdown-style vehicles, like private equity funds, request, or call, an asset owner's commitment amount over a period of months or years. This means that the investor must make sure they have the right amount of cash on hand at any given time to meet these requests. In addition to staying on top of capital calls, investors must also note whether distributions are recallable and set that capital aside. When a distribution is recallable, a fund manager may request the capital back from the investor to fund further investments. Investing in foreign denominated funds can amplify these challenges.

The Challenges of Capital Calls in Foreign Denominated Funds

If an asset owner who uses the Euro as their base currency made a $1,000,000 commitment to a US private equity fund in 2021, they’ve probably set aside around €850,000 based on the average spot rate from the year. After committing to the fund, the asset owner completes an initial capital call of $300,000 or about €250,000. Fast forward to the summer of 2022 when they receive a capital call for $250,000, which is now worth the same €250,000. The asset owner has now allocated nearly 59% of the capital set aside for the investment yet has only completed 55% of the commitment amount. To address the shortfall the investor must then reallocate cash from other parts of the portfolio to make up the difference. While this cash shortfall is relatively small for a single investment, when viewed in the context of a full portfolio with multiple commitments made in a range of currencies, it can quickly become a major issue for an asset owner.

How Solovis Supports Asset Owners Tracking Foreign Currencies

For asset owners investing in strategies denominated outside of their base currencies, Solovis Portfolio Analytics provides a clear and accurate picture of currency exposure and portfolio risk. The platform tracks all investments in their local currencies giving asset owners full visibility into the exact amount of uncalled capital they must fund. Combine this with the cohesive view of a multi-asset class portfolio that is possible in Solovis, investors can see exactly how much cash they have on hand as well as where they can find liquidity in the event of a shortfall.

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Andres Ramos

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Andres Ramos is a specialist at Nasdaq focused on the world of institutional investing.

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