Princess Private Equity (PEY ) plans to unwind its costly currency hedging strategy that forced it to scrap its interim dividend in a shock move last year.

The £890bn euro-denominated global portfolio, which invests in unquoted companies alongside and through its asset manager Partners Group, made the shock decision to axe its interim dividend in November last year.

The Guernsey-based investment company was unique among London-listed private equity funds in hedging out currency movements which can swell or scupper investment returns. Last year the €60m cost of settling these as the US dollar strengthened against the euro on the back of rising interest rates strained the portfolio.

It announced its currency hedging strategy, which it said had ‘prioritised net asset value stability in times of more significant change in exchange rates against the euro’ would be discontinued from 1 April.

‘The contracts which are currently in place are of a short duration and will be closed out as of 31 March,’ said the board of the fund.

‘The company will report the underlying investment currencies to allow investors who prefer a hedged exposure to apply their own hedging overlay.’

The board added that the end of the hedging strategy will ‘reduce the volatility of cashflow while increasing NAV volatility as a result of changing foreign exchange [FX] rates’.

The fund also reconfirmed its target of paying a dividend of at least 5% of opening NAV, and the first payment for the full-year 2023 is expected to be 0.36 euro cents, delivering a dividend yield of more than 7% at the current share price.

Liberum analyst Shonil Chande said while the FX hedge reduced liquidity by €60m in the first three quarters of 2022, it actually added €30m in the fourth quarter.

‘These large liquidity swings make it difficult for the manager to plan cashflows and commitments intra-year, which is why the board decided together with the manager to remove the hedges,’ he said.

Chande said the move made ‘eminent sense’ as currency volatility ‘can become a major obstacle to managing portfolios with committed capital’ and create a ‘liquidity squeeze’.

‘With interest rate differentials today much higher than even a year ago, the costs of hedging are also larger, increasing this risk to investors,’ he said.

The fund reported a 1.6% year-on-year NAV decrease in the fourth quarter to €14.62 a share, but the NAV ticked up slightly in January despite negative currency movements.

One of the largest drivers of returns was Ammega, the Dutch manufacturer of conveyor belts whose acquisition-led growth Partners has backed for nearly five years, making it the third largest holding in the Princess portfolio.

The managers said in the latest fund factsheet that Ammega ‘continues to benefit from its ongoing cost saving initiatives and key value creation workstreams’.

Global Blue, which offers foreign exchange services for travellers, also contributed positively after the New York-listed company benefited from the ongoing recovery in travel volumes.

‘Global Blue reported improvements across all geographical segments, especially in Europe and the US,’ said the managers.