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July 2023 | Issue 256
News
Large LPs turn to net asset value tools to finance private equity portfolios
Large LPs turn to net asset value tools to finance private equity portfolios
Tom Davidson
Managing editor
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NAV financing has a long history as a tool for private equity managers to get new capital into older funds, but now interest from creative institutional investors is widening its appeal.
The basic concept for these structures is a NAV credit facility in which a lender provides financing to a fund, usually private equity, with the loan availability based on the net asset value of the fund’s portfolio.
At the start of a private equity fund’s life, it will typically use a subscription-backed credit facility, where unused capital acts as collateral for the loan.
NAV credit facilities, on the other hand, are often used by private equity funds after the fund has matured beyond its investment period, when it has exhausted most of its investor capital commitments.
NAV credit facilities often include various loan-to-value triggers. If the LTV falls below specific thresholds, these can lead to mandatory prepayments, cash sweep mechanics, or pricing adjustments.
“NAV financing offers a way to silo a subset of assets”
Ryan Moreno, Partner | DLA Piper
According to market participants NAV credit facilities start at around Sofr+500 basis points and range to Sofr+900bp.
The tight fund-raising market, and bountiful opportunities for add-on investments, has made NAV financing attractive for private equity managers.
“We’re starting to see the NAV facility evolve from its origins as a product for funds of funds or later stage RE funds looking to obtain additional liquidity and a supplement to equity capital,” says Ryan Moreno, a partner in the finance group at DLA Piper.
“Now we’re seeing more interest in the product from large LPs, like pension funds or corporate venture arms, who are interested in financing their portfolios of private equity.
“For larger LP clients a NAV financing offers a way to silo off and borrow against a subset of their investments.”
Where traditional NAV facilities have been mainly provided by specialist lenders, such as Hark Capital in the US and 17Capital in Europe, growing interest has attracted direct lenders with deep pockets.
Pemberton, for instance, launched a NAV financing strategy in April last year, and Ardian launched a platform in 2018 specifically for secondary fund financing. Meanwhile, market sources say both Blackstone and KKR have provided large-scale NAV financing this year.
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Global credit funds & CLO's
July 2023 | Issue 256
Published in London & New York.
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