Not long ago, NAV lenders – to the extent they were thought of at all – were largely thought of as lenders of last resort for managers with struggling assets. The high cost of capital meant these products were to be thought of as emergency funding.
But the covid pandemic proved the growing market’s coming-of-age moment, it seems. A recent testament to that: preferred equity and NAV lender 17Capital completed 15 deals across the US and Europe in 2021 totaling $2.8 billion, with 80 percent of them being done with top 100 global private equity managers by size, according to managing director Richard Golaszewski. Five of those deals were NAV loans, and all of them were done with top 100 managers, and one was done with a top 10 PE manager, he told Private Funds CFO. In 2020, the firm executed 10 NAV deals worth $1.5 billion. The firm has completed 70 deals since its 2008 inception.
“Big picture, portfolio finance continues to be a growing tool in the toolkit,” said Golaszewski, who added that the firm’s NAV deal flow totaled some $25 billion in 2021.
Not only are firms increasingly seeing portfolio finance as a valuable tool, but they’ve become more educated about its potential uses. More than 60 percent of 17Capital’s business is repeat business, Golaszewski said, and borrowers are using portfolio finance in evolving ways. Of course, as managers increasingly hold on to their best assets for longer, financing for post-investment period, value-add acquisitions are a popular use of portfolio financing. “If you have additional capital needs post-investment period, it’s far more clean for everybody involved to solve those at the fund-level, as opposed to using co-investment vehicles and cross-fund transactions,” said Golaszewski.
But borrowers are also using the financings to kickstart new investments in new asset strategies or new geographies, make their initial investments, increase commitment sizes, or accelerate liquidity back to investors, or as a means to effect an ownership transition. NAV loans can act as a non-dilutive alternative to a GP minority stake sale, as Private Funds CFO previously reported in a Q&A with BC Partners Credit.
“We are increasingly relevant again to the best managers, not just at their funds, but also up at their own businesses,” he said.
LPs are even increasingly using both the pref and NAV-loan pools of capital at 17Capital’s disposal (the firm refers to both pref and NAV loans as ‘NAV financings’), Golaszewski said. For LPs that can’t make investments in the sizes they’d like with their favorite managers, portfolio finance might be an attractive solution.
“We like to say we don’t work with sellers,” Golaszewski said, speaking of LPs looking to dispose of interests in the secondary market – a space that has a lower cost of capital and which many banks lend into. “The beauty of our capital is that if there’s a period of time where there’s less volume in the secondary market, [and] is less attractive for traditional investors, we may be even more of a relevant solution.” But as long as valuations are high and interest rates low, portfolio sales are less interesting to the firm.