Family offices exploring NAV loans as secondaries alternative

Smaller, less institutional investors are increasingly exploring alternatives to selling on the secondaries market, according to panelists at the Global Fund Finance Symposium in Miami Beach last week.

Speaking at the event, one law firm partner said there has been an increase in enquiries from family offices and high-net-worth individuals about NAV-based loans – a “new development” in a market dominated by institutional investors.

“They have amassed a portfolio of 10, 15 LP interests and are saying, ‘Can we use this technology to provide some liquidity against the interests that we hold?'” she said.

“We’ve seen a ton of family office deals,” added another law partner.

The participants cannot be named because the event was held on a background basis.

Family offices are less inclined to sell on the secondaries market than institutional investors, Secondaries Investor noted last month. They have longer return horizons and unless they are liquidity-constrained, rarely feel the need to sell assets that are performing well.

The ability to access liquidity via the NAV loan market could make it even more difficult to boost the sell-side participation of family offices, of which there are more than 10,000 globally, according to one New York-based secondaries adviser.

Leverage has also become more prevalent in the GP-led market, panelists noted. Buyers are juicing returns by underwriting deals with equity and back-levering them post-close with cheaper NAV-based facilities.

“Our thought process is that if a concentrated deal can’t stand on its own merit return-wise, we wouldn’t [back lever],” said a managing director from a large secondaries firm. “But it’s evolving… I don’t know exactly where leverage levels are but I don’t think we’ve pushed the limits.”

NAV facilities will typically offer secondaries investors involved in GP-led deals a loan-to-value ratio of up to 40 percent, according to law firm White & Case.

In January 2021, lender Investec noted a “significant uptick” in financing requests for GP-led deals in the third and fourth quarters of 2020, driven by lower interest rates and increased competition.

“What we’ve seen in the last couple of months is that a lot of the players that have never used more deal-based solutions are happy to explore and implement those deals,” said Investec’s head of secondaries Ian Wiese at the time, adding that this incudes a number of large buyers that have long proved resistant.