In 2025, Latin American currencies have experienced significant fluctuations against the U.S. dollar, influenced by global economic shifts, political developments, and regional dynamics.
Performance of Key Latin American Currencies in 2025
Brazilian Real (BRL): In 2024, Brazil experienced a net outflow of $18.01 billion, the largest since 2020, leading to a depreciation of over 27% in the real. However, in early 2025, the real has shown resilience, appreciating approximately 1% against the dollar in spot markets. Source: reuters.com
Mexican Peso (MXN): Following the U.S. presidential election in November 2024, the peso reached its weakest level in over two years, trading at 20.81 pesos per dollar. Concerns over potential trade barriers under the new U.S. administration have contributed to this decline. Source: reuters.com
Argentine Peso (ARS): In 2024, the Argentine peso strengthened by 44.2% in real terms against a basket of trade partner currencies, adjusted for the country's high inflation. This appreciation has led to increased domestic costs, affecting export competitiveness. Source: ft.com
Colombian Peso (COP): As of January 23, 2025, the peso strengthened to 4,245.64 per dollar, influenced by expectations of potential interest rate cuts by the U.S. Federal Reserve, which have weakened the dollar globally. Source: riotimesonline.com
Implications for Private Equity and FX Hedging
The volatility in Latin American currencies underscores the importance of robust foreign exchange (FX) hedging strategies for private equity (PE) firms operating in the region. Currency fluctuations can significantly impact investment returns, especially amid economic and political uncertainties.
In 2025, hedging costs have become more favorable due to global monetary policy adjustments. For instance, the narrowing interest rate differentials between emerging markets and developed markets have led to a significant reduction in hedging costs. Source: flow.db.com
Key Considerations for PE Firms:
Assess Exposure: Identify and quantify FX exposure at both the portfolio company and fund levels to understand potential risks.
Implement Hedging Strategies: Utilize financial instruments such as forwards, options, or swaps to mitigate adverse currency movements.
Monitor Economic Indicators: Stay informed about global economic trends, central bank policies, and geopolitical events that could influence currency markets.
By proactively managing FX exposure, PE firms can enhance return predictability and safeguard investments against unfavorable currency movements in the dynamic landscape of 2025.
Why FX Hedging Matters for Private Equity
Foreign exchange risk can have a direct impact on private equity returns - and many firms are still underestimating its importance. Some PE managers hesitate to hedge due to concerns about cost, complexity, or the misconception that hedging ties up too much capital.
In the past, high hedging costs (especially in LATAM over longer tenors) made it difficult for PE firms to justify FX risk mitigation. However, with central banks lowering interest rates globally to stimulate economies, hedging costs have dropped significantly.
For example, hedging USD/BRL currently costs around 1.3% per year - making FX risk management more affordable than ever.
A Shift Toward Natural Hedging Strategies
As a result of FX uncertainty, some PE firms have pivoted to natural hedging strategies, such as:
Investing in companies whose revenues and liabilities are in the same currency
Selecting businesses that earn in USD but have local currency costs
While this approach helps reduce direct FX mismatches, it does not eliminate currency risk entirely - particularly for long-term investors with locked-in capital commitments.
Understanding FX Exposure in Private Equity
Unlike corporate FX exposure, PE funds face multiple layers of currency risk across different levels of investment:
Portfolio Companies: Each business within the fund has its own FX exposure.
PE Fund Level: The fund consolidates all FX risks across its portfolio.
General Partner (GP) Level: GPs may receive management fees in a different currency than their base currency.
Investor Level: International investors commit capital for at least 5 years, meaning short- to medium-term FX risk must be actively managed.
The Bottom Line: FX Hedging Reduces Volatility
For PE firms investing in emerging markets like Brazil and Mexico, currency fluctuations are a persistent risk. By implementing a structured FX hedging strategy, General Partners (GPs) and Investors can reduce or neutralize return volatility—ensuring more predictable performance despite external market shocks.
With lower hedging costs and increasing market uncertainty, now is the time for PE firms to re-evaluate their FX hedging approach and take control of currency risk.
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