Crucial questions about NAV: How big could NAV finance get?

The potential size of the NAV finance market opportunity is the subject of much speculation. NAV deals are seldom announced, and so estimates of current and projected volumes vary. “NAV financing lines are often kept out of the public eye, so it can be difficult to assess the true size of the market,” says Khizer Ahmed, founder and managing member of Hedgewood Capital Partners.

“But qualitatively, we can see that new entrants continue to proliferate, and new use cases continue to emerge. The NAV product has become an intrinsic part of the fund ecosystem, which is populated today by some of the biggest and most respected names in the banking and non-bank space. When you consider that these blue-chip organizations are recruiting dedicated staff to pursue NAV financing strategies, that is a very healthy indication that this is a sector poised for growth.”

Meanwhile, the caliber of borrower is also impressive. Carlyle is understood to have recently taken out a €1.25 billion NAV financing loan against assets held in one of its flagship European buyout funds in order to accelerate distributions to LPs.

There have been attempts to quantify the market opportunity, of course. “Stepping back and thinking about the size of private markets with total AUM of around $5.2 trillion and unrealized value of $3.7 trillion, according to Preqin, the opportunity for NAV finance across the various private markets asset classes is clear,” says Jamie Mehmood, partner and head of fund finance advisory at Deloitte. “It does not seem too off-beam to see the market developing in a similar way to the subscription line market and becoming a key part of a fund CFO’s toolkit.”

Dave Philipp, partner at Crestline Investors, says: “The market for NAV-based financings is estimated to be between $80 billion and $100 billion today, with about $30 billion of transactions in 2022 alone. This market has more than doubled in the last two years and continues to see tremendous growth and acceptance.

“We believe the NAV financing market is still in the early-to-mid innings of development and will likely double in size over the next two to three years as the number of users grows and the use of proceeds continues to expand. We have witnessed an expansion of asset classes that now encompasses not only buyout funds, but venture, growth, real estate and infrastructure.”

Limits to growth

There is an inherent limitation on the growth of the NAV product because the loan to value ratio of these facilities is not that high, according to Debevoise & Plimpton partner Pierre Maugüé. “LTVs fall in the 10-20 percent range, which means that the amount of NAV financing available to a given fund won’t exceed 10-20 percent of net value of the fund’s assets. Of course, as we see more and bigger mega-funds in the market, that will still result in some very sizeable transactions. Indeed, we have already seen deals of $1 billion-plus.”

Debevoise & Plimpton partner Tom Smith adds that NAV finance has taken off more quickly in Europe, meaning there remains huge potential in the US. “Anecdotally, we understand that the NAV market in Europe has been $20 billion-plus for the past couple of years. However, preferred equity remains the more common route in the US and growth there has been more limited.

“The potential in that market, therefore, is enormous. Just look at what happened with capital call facilities. That market grew to the point where every GP was utilizing the product. While I don’t expect every GP will ultimately use NAV financing, I expect to see a similar trajectory. Yes, the handbrake is on a little at the moment, due to underlying rates and the impact on pricing, but as soon as that softens, the handbrake will come off.”

“We believe the NAV financing market is still in the early-to-mid innings of development”

Dave Philipp,
Crestline Investors

The most oft-cited and ambitious projection for the potential NAV finance market opportunity, meanwhile, is the $700 billion by 2030 cited by 17Capital. “We saw $35 billion in dealflow in 2022, up around 50 percent on the 12 months before, and we have seen similar annualized growth rates over previous years,” says managing director Greg Hardiman. “On that basis, we believe $700 billion to be a realistic figure.”

Huge potential

What will really determine the ultimate size of this market, however, is adoption. “Five years ago, I would say around 15 percent of GPs understood this product and how it can be used,” says Thomas Doyle, partner and head of NAV financing at Pemberton. “Today, that has risen to around 85 percent. But adoption itself remains far lower. There are probably still only around 15 to 20 percent of managers that have used such loans. That, of course, means there is still a huge growth potential.

“Over the past 10 years, the battleground between LPs and GPs has been the use and potential misuse of sub lines. Twenty years ago, it was divided recaps by individual portfolio companies. Today the focus is on NAV. LPs and GPs need to engage with one another to determine what is and what is not acceptable and desirable. That is what will ultimately determine how big this market can become.”