FX Without Tears: how smart hedging saves your IRR

The clinic, the contract, and the currency

Picture a district hospital. Theatre lights must never fail. A solar-plus-battery system will save money and lives by removing diesel shocks. The PPA is fair: CPI plus 3% indexation, availability guarantees, and a bursar escrow that covers three months of bills.

A London allocator likes the underwriting - until someone asks: what happens if the local currency drops 20%

Silence in the room. Spreadsheets close. The deal dies. Sound familiar

We keep seeing good assets abandoned because FX is treated like a mystery. It is not. It is a line item. If you plan it, price it, and show it on the dashboard, committees can say yes (and sleep).

The context you are underwriting against

• Access needs remain huge. 565 million people in Sub-Saharan Africa lack electricity; progress is positive but slow. Hospitals, schools with boarding, and agro-processing are priority buyers because reliability is mission-critical.

• Capital is growing but still thin. Africa’s record year in 2023 was about 15 billion dollars - only ~2.3% of the global total. More bankable deals need de-risked cash-flow stories that ICs accept.

• Local-currency tools exist. We partnered with TCX (https://tcxfund.com) was built to hedge frontier currencies using swaps and forwards so that hard-currency funders can deliver local loans or hedge local revenues without blowing up the investor’s home-currency result. AfDB just committed new equity to extend that access across Africa

• As of 2021-2022, Africa's annual climate finance reached $43.7 billion, with public and private sources jointly accounting for essential contributions. However, this is just 23% of the nearly $190 billion needed annually to meet the continent's climate goals under the Nationally Determined Contributions (NDCs). To bridge this gap, climate finance must increase more than fourfold each year until 2030.

The mechanism - what “hedged home-currency IRR” actually means

• Tariff design in local money.

  • Index the PPA to local CPI + a small real margin (for example, CPI + 3%). This keeps purchasing power stable for the offtaker (hospital, school, mill), avoiding diesel-linked volatility that can backfire when fuel prices fall.

  • Collections discipline (escrow, prepaid wallets for dorms, anchor guarantees where appropriate) reduces arrears variance.

• Hedge the revenue path, not the press release.

  • Use a cross-currency swap or forward to convert expected local-currency net cash (at project or portfolio level) into your home currency.

  • For frontier currencies, specialist providers like TCX can quote tenors long enough yearly to match PPAs, with non-deliverable structures where capital controls exist.

• Show the unit economics, not adjectives.

  • Treat the hedge premium (and any initial discount/premium) as a percentage of project value or pence per kWh. If the hedge costs 0.3-1.2% a year and avoids 6% - 12% of downside in a P10 scenario, it is a rational purchase.

  • Publish the hedge cost and mark-to-market policy in quarterly packs. No surprises

Worked example (illustrative, rounded)

• Asset: 350 kW PV + 500 kWh battery on a privately operated hospital.

• Tariff: Local-currency PPA, CPI + 3%, availability retainer plus payment security.

• Collections: 3-4 month escrow and/or performance bond bank guarantee; parametric weather premium sized to 0.3%-0.8%.

• Debt: Equity from a GBP investor base; Local-currency senior (if any);

Unhedged home-currency view

• P50 equity IRR (local) = 15%.

• If the local currency depreciates at an annual rate of 8% over 5 years, the GBP IRR can fall to ~5-8% (directionally).

Hedged view (portfolio swap via TCX)

• Swap cost equivalent: 0.9% p.a. (illustrative for logic).

• P50 GBP IRR = ~13.8-14.2% after hedge cost.

• P10 GBP IRR floor materially higher than unhedged because the hedge absorbs depreciation.

• Committee outcome: “predictable annuity-like return” instead of “FX speculation by accident”.

Note: numbers are illustrations to show the mechanics; always price with live quotes.

Where hedging belongs in the stack

• Best fit: portfolios or clusters with reasonably predictable net operating cash after O&M and debt service.

• Layering:

  • Local-currency debt if available (reduces mismatch),

  • CPI-indexed revenue (protects local affordability),

  • Swap on equity distributions or project cash to stabilise home-currency results.

• Who should not hedge: short-tenor trading positions, or strategies explicitly paid to carry FX risk. Do not pretend to be what you are not.

Risks and how to underwrite them honestly

• Hedge cost uncertainty. Prices move. Solve with range scenarios (e.g., +/- 0.5%) in IC packs and document a trigger to pause new hedges if pricing breaches a pre-agreed ceiling.

• Tenor and liquidity. Not every currency has a 10-year depth. Use staggered ladders (e.g., 3+3+4 years) and portfolio/project netting.

• Counterparty concentration. Spread exposure, monitor credit, document downgrade actions.

• Basis risk. If tariffs are tied to CPI, but your hedge proxy references another index or rate, explain the gap and keep it small.

• Policy shocks. PRI (political-risk insurance) for inconvertibility/transfer can backstop extreme cases where cash cannot exit despite a valid hedge.

What to ask your manager (copy-paste to DDQ)

1. Policy: Do you have a written FX policy with target hedge ratios, tenors, and stop-conditions

2. Pricing: What is today’s all-in annualised hedge cost for KES/NGN/ZMW (or relevant currency) for 3-10 years

3. Coverage: Which part of the cash flow do you hedge - distributions only, or project operating cash

4. Governance: Who approves changes to hedge ratios and counterparties? How often do you report MTM

5. Stress: What happens to home-currency IRR if the local currency falls 30% in year 1 and 10% thereafter

6. Alternatives: If live quotes are uneconomic, what structural changes to the PPA (e.g., CPI bands, collar) are on the table

If these answers are vague, you are underwriting hope.

What you should see on the Tribes Capital dashboard (investor view)

1. Home-currency IRR alongside local-currency IRR (both P50 and P10).

2. Hedge coverage ratio (e.g., % of forecast distributions hedged, by tenor).

3. All-in hedge cost shown in percentage (%) of project/portfolio value and as pence per kWh equivalent.

4. Counterparty list with concentration limits.

5. Variance attribution: what moved your last quarter result - FX, weather, collections, or O&M.

6. Impact tiles: uninterrupted operating hours for theatres, study hours, vaccine-safe cold storage - the reasons these buyers pay.

If you cannot see it, you do not truly own it.

What we might be underestimating

1. Liquidity can disappear. Frontier-currency swap markets can thin out in crises. We manage with staggered hedges and optionality, but there are no guarantees.

2. Hedge costs can spike. A sudden policy shock can make quotes ugly for a period. Our response is to show this transparently and slow new commitments until pricing normalises.

3. Hedges are not impact. They just protect the path that lets real impact happen (hospital uptime, study hours, crop throughput). We must never confuse tooling with purpose.

Why this matters beyond the spreadsheet

Remittances to low- and middle-income countries were about 685 billion dollars in 2024 - larger than FDI and ODA combined. That is families voting with money for stability and opportunity. Clean, reliable power for hospitals, schools and agro-processors does the same: it creates the stability that makes communities invest in themselves.

Private capital will not fix everything. But if we price currency risk like adults, it will fix more than it does today.

So what - three allocator moves this pence

1. Adopt an FX policy. Even a one-pager beats tacit risk-taking.

2. Price the seatbelt. Ask for live TCX-style quotes on target currencies and show the cost in percentage (%) alongside the IRR.

3. Demand the dual view. Require both local and home-currency performance on every report page.

Gut-punch question

Would you pay 0.9% a year to lift your P10 home-currency outcome by 5%-8% and make distributions boring?
Reply SEATBELT if yes, FREEFALL if no.

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