Say a US PE firm buys a European firm using USD funds. The target has USD revenues and EUR costs, resulting in an adjusted EBITDA made out of USD 70mn and EUR -20mn. Using a 5.0x valuation multiple, the fund has effectively a short EUR 100mn exposure. If I decide to hedge, should I enter a EUR 100mn at the parent level, or can I simply hedge the EUR 20mn at the operating co level every year (which removes any currency risk in the valuation of 5.0x multiple remains constant)? Someone told me that I should hedge the cash flows at the op co (say for the duration of the investment) and hedge the remainder of the economic exposure at the fund level, just not sure why. Thanks!
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