Currency Risk: Curse or Opportunity? Why We Consciously Embrace the Brazilian Risk

Currency Risk: Curse or Opportunity? Why We Consciously Embrace the Brazilian Risk

Introduction:
When investors consider allocating capital outside of Europe, the same question inevitably arises: "What do I do about currency risk?" The thought of unpredictable exchange rates scares many people off. But a deeper look reveals that currency risk is not only manageable—it can even present an opportunity. In this blog, we’ll explain how ARD deals with currency risk, why the Brazilian real is not the enemy, and how you as an investor might even benefit from it.

What is currency risk, and why does it matter?
Currency risk arises when you invest in a country whose currency differs from your home currency. In the case of Brazil, that means the Brazilian real (BRL) versus the euro (EUR). If the BRL depreciates against the euro, this can impact your returns when converting profits back into euros. However, that’s only one side of the coin.

Why currency risk isn’t a dealbreaker for smart investors

1. Higher returns as a buffer:
   Our projects in Brazil generate gross returns (IRR) between 20% and 25%. Even with an unfavorable exchange rate, there’s ample margin to secure a solid net return.
2. Realistic exchange rate trends:
   The Brazilian real has historically been volatile, but it also experiences periods of strength. With the gradual decline of the SELIC interest rate and increasing foreign investment, we’re currently seeing a stabilizing trend.
3. Natural hedge:
   Many costs and revenues within our projects are in BRL, providing a natural hedge. For larger investments, we can also implement specific hedging strategies.
4. Currency diversification as a strategic move:
   For investors with euro-heavy portfolios, adding BRL exposure is an attractive way to diversify against European inflation or economic stagnation.

How ARD structurally manages currency risk

• Project selection with short cycles (3–4 years):
  The shorter the investment horizon, the smaller the currency risk. Our projects are purposefully designed to be realized and exited within this timeframe.
• No reliance on local financing:
  Since we operate through equity joint ventures and don’t use leverage from Brazilian banks, we’re less sensitive to interest rate or exchange rate shocks.
• Collaboration with currency partners:
  For large investors, we can arrange tailored currency contracts (forwards, swaps) through CPX Capital.

Case Study: Putting currency movements into perspective
Let’s say you invest €250,000 in a project with a gross IRR of 24%. After 4 years, this could return €590,000 (gross). Even with a 10% BRL depreciation, you’re still looking at a strong net return. At ARD, we focus on the full picture—not just one isolated risk factor.

Conclusion:
Currency risk is a familiar concept in international investing. But it’s no obstacle when you apply the right strategies, work with the right partners, and choose the right projects. In our approach, currency risk is a manageable part of a broader return scenario. And in many cases: an opportunity.