Partners Group launches dedicated NAV financing vehicle

Partners Group has become the latest firm to launch a dedicated fund finance vehicle.

The Swiss-headquartered alternatives giant established Partners Group Fund Financing Solutions on 14 February, according to a disclosure on its website. The fund will invest primarily in GP-led and LP-led NAV loans and opportunistic investments, including NAV preferred equity investments.

PGFFS has been characterised as an Article 8 fund under the EU’s Sustainable Finance Disclosure Regulation – a designation that applies to products either promoting environmental and social characteristics or committing to some sustainable investments. According to the filing, PGFFS will promote a reduction in investments in fossil fuels and will avoid assets linked to the deforestation or burning of natural ecosystems for the purposes of land clearance.

At least 80 percent of the fund’s assets will target investments used to attain the environmental characteristics promoted by PGFFS, the filing noted. The remaining portion will be in hedging and liquid assets that are used for efficient liquidity, portfolio management and/or cost management purposes, rather than as part of its investment portfolio.

A spokesperson for Partners Group declined to comment for this report.

“Our view is that NAV financing is here to stay, and [will] grow as a tool for GPs to manage liquidity,” Andrew Bellis, head of private debt at Partners Group, told affiliate title Private Equity International last year.

“We are in a very different place today in terms of financing, fundraising and exits, which is challenging for sponsors, and you also have a dynamic where banks are still active in this area but only in a certain part of the market. There is a big opportunity for private debt providers here, and we think about this not just as a GP tool but also as an LP tool. Instead of doing a secondaries sale, LPs could access liquidity through the use of finance.”

Partners Group’s launch coincides with skyrocketing demand for these facilities among GPs. The market for NAV-based financings was estimated to be worth around $80 billion-$100 billion as of December, Dave Philipp, a partner at Crestline Investors, told PEI at the time. “This market has more than doubled in the last two years and continues to see tremendous growth and acceptance,” he said.

The NAV finance market could grow to $700 billion by 2030, up from $100 billion in 2022, according to fund finance provider 17Capital.

According to an October white paper from Crestline, based on its own transactions, the majority (65.7 percent) of NAV facilities are used for reinvestment by GPs, with refinancing the next most common use at 25.9 percent. However, a small proportion of these loans – 8.4 percent – are used for distribution trades, in which the GP creates a synthetic distribution for their investors.

Such uses have proven controversial among LPs. Capstone Partners’ Liquidity Solutions Survey 2023 report found that NAV financing and preferred equity have been used by 12 percent of GP respondents in the past, and this year will see a slight uptick to 14 percent. This is despite more than half of LP respondents viewing NAV financing and preferred equity as a ‘poor’ way to generate liquidity.

Some LPs have voiced their concern over the recallable nature of NAV facilities, which can prevent investors from redeploying this capital as fresh commitments.

In December, Scott Ramsower, head of private equity funds at Teacher Retirement System of Texas, told affiliate title Buyouts the institution was against distributions created via NAV financing, noting that the practice involved “cross-collateralising the equities” in its portfolio and was inefficient given that an LP could get leverage cheaper than the GP.

“We’re overallocated, we need money back, so that’s creative,” he said. “However, they’re not getting credit for it in our track record analysis, as all DPI is not created equal in our opinion. We call these use cases ‘synthetic DPI’ and we carve it out when we assess their performance.”