SVB Report: Data Insights - Currency Management

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Pre-IPO tech firms' FX exposure

Technology companies are not only waiting longer to go public, but also approaching IPOs with larger and more mature businesses than before. In many cases, by the time these companies file they have substantial overseas revenues and correspondingly large currency exposures.

Nine in 10 of them reported global revenues. The companies under review generated 34% of revenues outside the United States, on
average — nearly as high as the average percentage of international revenues at S&P 500 companies.  

FX exposure growing fast

IPO filings consistently reported that pre-IPO tech firms' international revenues were growing much quicker than US revenues. Although international growth comes off a lower base and could slow in future years, tech firms' global currency exposure seems likely to increase in the years to come.

Little visibility into FX exposure

Generating substantial and increasing revenues outside the United States exposes these pre-IPO tech firms to considerable foreign currency risk. They know this: 90% of the firms reviewed identified FX as a risk factor in section 1A of their IPO filings. 

But knowing the risk exists is not the same as understanding its impact on profits, which is the essential first step toward managing FX risk. To learn whether these firms had visibility into the ways currency risk affected their bottom line, we examined whether they broke out currency impact on their income statements. Very few did, suggesting that many pre-IPO tech firms have little visibility into an important risk that could affect profits.

Revenues in USD, costs in foreign currency

We examined whether the firms under review were taking steps to manage their FX risk. We found that many firms price their overseas goods and services in US dollars. That practice serves as a natural hedge to the currency risk associated with those revenues, but it tends to become more difficult as companies scale. Moreover, the vast majority of costs (84%) came in local currencies. 

Most do not hedge with derivatives (yet)

Large firms commonly use derivatives² to hedge currency risk. That practice was relatively rare among tech companies filing for IPOs between 2016 and 2019: One in 10 companies overall hedged FX risk using derivatives, including one in six among firms that reported non-US dollar revenues. About half hedged with other approaches, such as: 

• holding foreign currency through a subsidiary

• exploiting natural hedging alternatives

• billing and collecting in USD rather than foreign currency

Post-IPO firms 4x more likely to hedge with derivatives

We separated the companies in the small-cap tech index into two buckets: those that hedge FX using derivatives and those that do not. Nearly 40% of the companies in this small-cap technology index hedge using derivatives - four times the rate among the pre-IPO companies in our initial study.

Given that post-IPO firms do not have significantly more FX exposure that pre-IPO firms, their greater use of derivatives to hedge currency impacts may reflect not a response to the size of their exposure, but rather a step in the corporate maturation process.

More profitable firms tend to hedge with derivatives

We compared the profitability of companies that hedge with derivatives with those that do not. Specifically, we examined several key metrics related to EBITDA (earnings before interest, taxes, depreciation and amortization), a useful tool for gauging core profitability. Companies that hedged currencies using derivatives performed significantly better on a variety of EBITDA measures.

The data do not show a casual relationship between hedging currency risk with derivatives and greater profitability. However, at a minimum, these findings suggest a link between hedging currencies with derivatives and greater, more reliable profitability for small cap technology companies. 

An important note is that our statistical bias testing established that size alone does not fully explain why companies that hedge using derivatives are outperforming competitors.