The NAV financing market can broadly be split into two categories – bank lenders and non-bank lenders. However, bank appetite for NAV lending has reduced significantly over the course of this year.
“Over the past six to nine months, bank lending has become more constrained as liquidity has become tighter and risk appetite has reduced,” says Khizer Ahmed, founder and managing member of Hedgewood Capital Partners. “In general, banks appear less keen to commit to transactions with any kind of complexity, or with significant exposure to riskier asset classes such as venture capital. Specialty finance companies, however, continue to provide credible alternatives in the NAV lending space, particularly for complex or riskier transactions or where a high degree of bespoke structuring is required.”
Meanwhile, Jonathan Harvey – Investec’s head of relationship management, fund solutions, points out that banks tend to focus on lower returning deals with higher security. “They are more interested in the credit credentials of the portfolio, in terms of how the loan will be repaid. Funds, on the other hand, are more focused on returns and therefore charge higher prices but with looser covenants.”
However, Thomas Doyle, partner and head of NAV financing at Pemberton, says banks have pulled right back over the past six to eight months, mirroring retrenchment in other areas. “Many say they remain committed to the market, but the noise does not reflect the reality. There are exceptions, of course, but banks were always balance sheet constrained and that has only been exacerbated by everything that has happened this year. I don’t see banks being a big part of the solution.”
Non-bank lenders include specialty financing companies that have emerged from both the secondaries and private credit worlds. Here, appetite for NAV lending is accelerating.
“A growing number of dedicated pools of capital have been raised to pursue NAV lending,” says Darren Schluter, managing director in the secondaries advisory group at PJT Park Hill. “During the first quarter alone, PJT touched base with at least 30 new entrants. These groups tend to have a higher cost of capital than banks, as they need to be able to earn management fees and carry.”
Institutional investors – and insurance firms in particular – have been key players in this market, though Greg Hardiman, managing director at 17Capital, says insurers have primarily focused on loans to private credit funds or diversified secondaries portfolios.
But Doyle notes that the National Association of Insurance Companies has recently raised issues with rated notes, which has paused interest as insurers wait to see how their capital treatment will be impacted.
“Insurance companies have remained active,” adds Ahmed, “but the relative return hurdle for capital deployment in the credit space has increased.”
As the lender ecosystem expands, it is also becoming increasingly differentiated. Hardiman points out that while his firm is focused on the private equity industry, there are others focused on private credit, infrastructure and real estate.
Lenders are also differentiating themselves in terms of the types of deals they are willing to entertain. “In some circumstances, merely having the ability to review a situation and come up with a set of terms is differentiation enough,” says Ahmed. “We recently executed a complex, multi-jurisdictional transaction involving a number of funds early in their investment lives and including strategies that were a little off the beaten track.
“Having spoken with more than two dozen lenders across the bank and non-bank space, very few felt able to proceed. Eventually, we completed the deal with a non-bank lender. That was an example of a deal where the lender’s ability to engage with the client and finetune a transaction so as to address the specific needs of the borrower, while still complying with its business mandate, was all the differentiation that was needed.”