Single Hedging Approach Transformed a Fund’s IRR
MARKETS: PRIVATE EQUITY | COMMODITY: VARIOUS

Situation

Every private equity firm is focused on boosting returns while simultaneously mitigating risks. One elected to attack commodity exposures within the portfolio to create more predictable financial performance and enhance its internal rate of return (IRR). In this case, the firm faced challenges in maintaining a single hedging strategy across its investment portfolio, given the number of commodities, including metals, energy, and agricultural products. The disjointed approach with a non-existent hedge program resulted in a suboptimal risk management approach which hampered profitability, negatively impacting the firm's IRR and investor confidence.    
 

Solution

Recognizing the need for a comprehensive and consistent hedging strategy, the private equity firm partnered with AEGIS, a leading hedge technology and risk management advisory firm specializing in commodity hedging solutions. AEGIS conducted an in-depth analysis of the firm's portfolio, considering each manufacturing company's unique commodity exposures and risk tolerance. Leveraging their expertise and patented analytics, AEGIS crafted a customized hedging program aligned with the firm's investment objectives and risk appetite.   

Working closely with the private equity firm's investment and operations team, AEGIS implemented a consistent hedging methodology across the entire portfolio. The solution involved:  

  • Streamlining internal processes 
  • Implementing market-leading technology 
  • Training key personnel 
  • Establishing robust risk-monitoring systems aligned with the company's objectives 

AEGIS implemented the solution and provided ongoing support and guidance to ensure seamless integration, ensuring the firm and investments met their financial targets and that the portco adhered to the new risk management framework.   

Outcome

Following implementing a single hedge program for both the fund and investments, the private equity firm experienced a remarkable transformation in its commodity risk management practices. The standardized approach enabled proactive management of commodity price fluctuations, reducing downside risk and enhancing cash flow predictability. Consequently, the portfolio's IRR significantly improved, boosting investor confidence and attracting new opportunities.   

The collaboration with AEGIS enabled the firm to optimize its risk management and streamline operations. The consistent hedging methodology brought transparency, efficiency, and cost-effectiveness to risk management processes, freeing up resources for value creation, strategic decision-making, and identifying new investment opportunities.   

By demonstrating a robust and disciplined approach to commodity risk management, the private equity firm solidified its reputation as a trusted entity within the manufacturing sector. The improved IRR and enhanced transparency into its commodity risk helped attract new investors seeking reliable returns, further strengthening the firm's market positioning and expanding its investor base. 
 
This case study is not required to be and has not been filed with the Commodity Futures Trading Commission ("CFTC"). The CFTC does not pass upon the adequacy or accuracy of this commodity trading advisor disclosure. Consequently, the CFTC has not reviewed or approved this case study. See further disclaimer below.

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