Whenever you are continued tension on the resource valuations get reduce execution, NAV loans was an organic tool to handle LP and you may recruit interest in liquidity and as an enhance so you’re able to security funding in what is going to almost certainly are nevertheless a difficult fundraising ecosystem
- Including Strategic Assets. We commonly see NAV loans structured in connection with the addition of strategic investments by a fund. These loans can be structured to provide acquisition financing, or to provide back-leverage to a fund to finance the equity portion of its acquisition costs for the particular investment(s). Such facilities are typically used later in the investment cycles of funds once capital commitments have largely been called or are no longer fully available.
- Money Efficiency to People. As average hold periods for private equity portfolios increase, there is continued pressure on sponsors to monetize their investments and provide liquidity to their investors. As a result, a common use of NAV loans is for sponsors to borrow at the fund level to return capital to investors. Lenders are repaid later after realization events with respect to one or more investments of the funds. In this instance, a NAV loan allows the fund to return capital to its investors in advance of one or more realization events with respect to its investments.
- Funding to have Management Companies. General partners and management companies use NAV loans for a range of purposes, including working capital, funding increased investment in the funds that title loans Chattanooga TN they manage, payment of taxes, payment of bonuses, technology upgrades, distributions to owners, and succession planning (i.e., transferring ownership interests in managed funds from founders to the next generation of investment professionals), to name a few. Such facilities s from the funds or by equity in in the funds.
When you find yourself proceeded pressure to the asset valuations get slow down execution, NAV finance was an organic tool to address LP and you will recruit demand for exchangeability and also as a supplement to help you guarantee financial support for the what will probably are nevertheless a difficult fundraising ecosystem
- Aftercare Organization. For funds with ongoing liquidity needs after the expiration of their investment periods, some lenders will agree to extend a fund’s existing subscription line facility subject to certain supplemental credit enhancements, including adjustments to the borrowing base to increase borrowing capacity (e.g., a substantial increase in the borrowing base from a traditional blended advance rate of 50% up to 90% is not uncommon). In return for this increase to the borrowing base availability, lenders will typically require the implementation of NAV-style covenants to mitigate against the reduced primary source of collateral and repayment in the form of uncommitted capital for these facilities and look “downward” at the asset value of the fund’s investments. See our colleague Chad Stackhouse’s in-depth discussion of these types of facilities here.
Whenever you are continued stress toward house valuations may decelerate execution, NAV finance try a natural unit to handle LP and you may sponsor demand for exchangeability and as a supplement so you’re able to security financial support in the what’s going to more than likely will still be a difficult fundraising ecosystem
- Facilitate Extension Financing. The use of financing for continuation funds has received a lot of press as of late. A continuation fund will be set up to transfer assets from an existing fund. The investors in the existing funds can elect to either be cashed out of the investment or to roll their equity into the new fund alongside new and existing investors. The purchase payment by the continuation fund for the transferred asset(s) (which is used to pay out exiting investors) may be funded in part using debt under a NAV loan.
Market meltdown, battle and you can rate of interest develops are among the of a lot headwinds for segments on the future days/many years. This is the autonomy off NAV formations and their many applications for sponsors that serve as an informed prognosticator getting continued robust gains.
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