The counterparties for NAV finance cover the full spectrum of the private equity ecosystem, from the funds themselves, where the loan is supported by the consolidated equity value of the portfolio, to the general partnership and even LPs. The use cases, meanwhile, can broadly be split into two categories: capital in and liquidity out.
“We have seen tremendous activity at a fund level over the past couple of years,” says Greg Hardiman, managing director at 17Capital. “That has been driven, in part, by a growth in adoption. In addition, hold periods have extended. The monetization environment is not ideal for many assets and so GPs are not inclined to sell. For those pursuing M&A-oriented strategies, in particular, that means continuing to invest in those platforms, which naturally requires additional capital.”
Historically, most GPs would have raised that capital at the individual portfolio company level, but today they are thinking more holistically about their financing options. “They often think of a NAV loan to the fund as an alternative to a holdco PIK instrument at the company level or bringing in outside equity co-invest,” Hardiman says.
“Typically, in these situations, the fund itself is almost fully deployed and GPs are thinking about what they have in remaining reserves and balancing that with future needs and opportunities in the portfolio. That is the most popular use case today.”
Meanwhile, NAV finance can also be used to accelerate distributions to investors, many of which are facing severe liquidity constraints in the current environment. “There is less buying and selling of assets going on right now and so there is more emphasis today on using NAV finance to generate distributions for LPs,” says Tom Smith, partner at Debevoise & Plimpton.
Khizer Ahmed, founder and managing member of Hedgewood Capital Partners, meanwhile, says he is seeing NAV facilities being put in place, pre-financial close, in reflection of a slower fundraising environment. “GPs are looking to NAV facilities in order to enhance their investible capital even before they have amassed all the necessary LP commitments and well before the final close of funds.”
Another use case is also emerging in reaction to climbing interest rates and the reduction in credit availability at a portfolio level. GPs are thinking about NAV loans as a means to de-lever, often in conjunction with a refinancing. “Over the past six to eight months, we have seen an increased requirement for capital at a fund level – in order to right size capital structures,” says Thomas Doyle, partner and head of NAV financing at Pemberton.
Hardiman says: “The GP may want to extend the debt maturity on a business but find that lenders are willing to lend at significantly lower leverage levels than they may have been 18 months ago.
“At the same time, there is less interest coverage at the portfolio company level as a result of higher interest rates. Using a NAV loan to reduce leverage and complete the refinancing at more attractive pricing, while also reducing the cash interest drag, gives the portfolio company more flexibility to navigate through what could be a choppy period of time.”
“We have seen tremendous activity at a fund level over the past couple of years”
In addition to fund-level financing, a NAV line can also be taken out against a firm’s balance sheet or a group of senior partners, in order to help the GP invest further in its own franchise. “That could be to fund larger GP commitments, to launch new strategies, to engage in M&A or to facilitate ownership transitions,” says Hardiman.
Finally, NAV finance can be used to help LPs utilize their existing portfolios, effectively acting as an alternative to a secondaries sale, while allowing the investor to hold on to future upside. “NAV loans can create additional capacity to invest further alongside an LP’s highest conviction managers,” says Hardiman. “This, in fact, was the original use case, although the market has since evolved dramatically to include the entire private markets ecosystem.”