GPs build NAV optionality into fund docs

NAV loans have seen a significant increase in popularity among managers, and some are looking to make it easier to take them out.

Managers are increasingly looking to build in the optionality to take out NAV financing into their LPAs, said panelists at the CFOs & COOs Forum in New York.

Some have amended their limited partnership agreements to allow existing funds to take advantage of NAV financing, and language is being built into the documents of newer funds to ensure managers can take out these high-interest rate loans without first having to make the case for their necessity to their advisory committees, panelists at a session focused on fund finance.

Managers that have amended fund LPAs to allow for NAV financing or that have included the option in new fund documents said their investors have not questioned the need for these increasingly popular loans.

“We want the option, just in case we ever need it,” one private equity CFO said. “It’s a significant cost, so right now I don’t know if we’ll ever go down the road. But we definitely want to be able to get a NAV facility if the costs come down and it’s a good option for us.”

Private Funds CFO has reported extensively on the burst of activity in the NAV financing market seen since the onset of the covid-19 pandemic in 2020. Most recently, an attendee at the annual Fund Finance Association gathering in Miami said he’d heard of GPs taking out NAV loans as pure leverage, for the express purpose of improving returns.

With higher interest rates and longer loan terms, experts say they are looking at every option to manage cashflows and improve their assets’ performance.

Half of the attendees of the panel said they are already using or considering using NAV loans, according to a live poll taken during the event.

One CFO, whose firm has not yet taken a NAV loan, said the firm is ramping up conversations with lenders as it prepares its next fund, and is considering amending its LPAs to be able to include NAV financing, should the need arise.

Managers said that since rising interest rates are not impacting more traditional subscription lines yet, those are still more attractive avenues for stabilizing operating capital than NAV loans.

It was noted during the panel that higher interest rates have not yet had any impact on borrowing requirements, but managers aren’t using subscription lines as heavily. One panelist at another session of the forum said that “tightening up” the firm’s use of sub lines was a significant part of controlling costs in an inflationary environment.