Some 600 fund finance professionals packed into the conference area at The Landmark Hotel in London on Tuesday for the Fund Finance Association’s European Symposium. It was packed so thickly, in fact, that the FFA will begin looking for a larger venue later this week, one official told me. Several sessions were standing-room-only, and the dining area was brimming during networking breaks.
I’ll bring you some detailed coverage of the panels I attended later this week, but for now, here are some highlights of my conversations and delegate comments thus far.
Despite the gloomy macroeconomic outlook, fund finance pros make the case that, for the most part, the industry’s offerings add so much value for GPs that higher pricing – the vast majority of NAV facilities and sub lines are floating rate – won’t be a long-term deterrent.
Non-bank NAV lenders, in particular, feel set to see a net benefit from higher rates improving absolute return, since they don’t borrow on the interbank market. And, indeed, non-bank syndication participants expect to see quite a lot more inquiries from bank lenders as rates go up and bank balance sheets hit concentration and other various limits.
Speaking with Private Funds CFO on the sidelines of the conference, 17Capital partner and co-head of credit David Wilson said his firm expects the NAV market to reach $700 billion in size by 2030. Only two years ago, fund finance professionals figured the sub line market would top out at $500 billion. Now, estimates range from $700 billion upward.
Insurance money is also flooding into the NAV and GP-line market. Practitioners say they’re getting more and more inquiries from insurance companies across the US, Europe and Asia. Asian insurance companies, and some banks like Norinchukin, were major supporters of the CLO triple-A rated tranches when that market was beginning to go into overdrive in the early 2010s. Should similar appetite arise (speculation on my part) from Korean and Japanese institutional investors, NAV and GP facilities would stand to benefit immensely, of course. Private credit ratings for NAV can give insurance companies the AAA stamp they often need, while giving them hefty yield.
One NAV practitioner speaking with Private Funds CFO said many of the largest PE houses that have their own insurance arms are also in the market, often hiring third-party structurers (perhaps to mitigate conflict-of-interest issues) to create NAV facilities for related entities. Those structurers are sometimes themselves insurance companies involved in the market. And, while innovations in NAV are creating new uses for NAV facilities, new approaches to structuring are also helping tailor yield targets to investors taking pieces of them down for themselves.
One possible hint of a toppy market in NAV has been repeatedly mentioned – although its appropriateness will in part depend on the type of investor involved – is NAV/preferred equity hybrids, in which, essentially, preferred equity is structured as a loan. (The wonky bit: the loan is granted to a special purpose vehicle, which uses the loan proceeds to subscribe to the pref within the investment-holding vehicle. The terms of the pref more or less mirror those of the NAV loan, meaning the lender’s security is over the SPV, with rights to the pref cash flows at the investment level.) Translation: if the credit line isn’t paid back, the lender is left with only preferred equity, rather than recourse to the assets. According to one fund finance lawyer – who, coincidentally, turns out to be a rather gifted karaoke singer – these structures are “incredibly prevalent” among mid-market and larger borrowers, and came into existence during the liquidity crises precipitated by the pandemic.
The question is whether the pricing reflects the risk. If the returns are higher than a traditional NAV, these structures can give GPs quite a lot of flexibility when they need it, the lawyer said.