Currency volatility could be significantly damaging the returns and investment potential of impact funds as well as other alternative investors deploying capital across Frontier Markets according to Ebury Institutional Solutions (EIS).

While impact funds are sitting on an estimated $73 billion of dry powder1 and there may be many exciting investment opportunities, there are also myriad risks and complicating factors throughout the investment journey.

FX risk has traditionally been a major barrier to entry, particularly given traditional banking providers provide minimal coverage of the less mature currency markets which are also characterised by wide swings and illiquid trading. 

This can leave funds exposed to the spot market for the duration of their investment and create difficulties when looking to repatriate capital after exit.

The Ghanian Cedi, for example, experienced 113% volatility through 2022 with the Sterling ending the year up 48%, demonstrating the potential for losses when exiting an investment if left reliant on the spot market. Such a swing would cause a fund considerable uncertainty or significantly erode total returns, while the likelihood of such swings may deter any investment in the country.

While traditional providers may struggle to meet the needs of the impact investment sector, Ebury Institutional Solutions have seen growing demand from these funds leveraging Ebury's expertise and solutions that cover a wide range of exotic currencies.

Jack Sirett, Partner at Ebury commented, “We have seen rapidly growing demand from investment funds that invest in Frontier Markets for solutions to the problems they face around FX risk management and the currency volatility associated with traditionally illiquid markets.

“Impact funds are reliant on maximising the potential of the capital they deploy in these countries yet can struggle hedging capital flows with traditional banking providers. It is a serious obstacle to investing in Frontier Markets because it means they are left exposed to the spot market for a prolonged period of time.

“We urge impact funds and other alternative investors to explore their FX services to ensure they have appropriate hedging solutions in place. This can provide the catalyst needed to take advantage of the significant investment opportunities across Frontier Markets.”