NAV loans are gaining popularity, but may take time to implement: Debevoise lawyers

GPs will need patience if they want to access fund level NAV loans as lenders struggle to assess value during the coronavirus crisis, according to a panel of experts.

“For anyone putting a new NAV facility in place – and while there are all sorts of non-traditional entrants in the market who view this as an opportunity to expand their market share – it just means there might be potentially more time spent on valuation and diligence in those assets, and it may take longer to put these facilities in place than it usually does,” said Ramya Tiller, partner at Debevoise & Plimpton.

Tiller was one of three Debevoise and Plimpton attorneys to address the Investment Adviser Association on a webinar entitled “Private Equity Managers and the COVID-19 Liquidity Crunch” Wednesday.

“Even in the best of times, NAV facilities take more than a couple of months to put in place, but there’s a lot of conversations for the lenders to understand the nature of the assets and how to value them and what the exit strategy is,” said Tiller. “Particularly in the current situation, it’s just going to take a lot longer for people to understand and get comfortable with the assets.”

Private Funds CFO recently reported on how concentrated NAV lenders and preferred equity financers are seeing historic dealflow, and how the scarce number of lenders will have a difficult time keeping up with heightened demand across the industry.

But even if lenders were able to keep up with demand, uncertainty around March 31 NAVs and the continued pressure on portfolio company revenues that will to continue into Q2 and Q3 will create another layer of difficulty around securing alternative fund finance.

“[In the] second half of the year ahead of us, we are expecting these events to put continuous pressure on private equity portfolios across a range of sectors,” Andrew Ahern, partner at Debevoise, said during the webinar.

Firms across the industry are facing significant dips in portfolio value, as March 31 NAVs begin to reflect the economic crisis underway.

“But you are going to see much more of an impact for the next quarter where it’s just going to be hard to see the value in an environment [in which] asset values are shrinking and obviously it’s going to have a significant impact on your LTV test,” said Tiller.