Boom in NAV financing set to continue
The net asset value (NAV) financing market is expected to go from $100bn (£79.3bn) as of 2023 to $600bn in six years’ time, as the asset class gains popularity among buyout funds.
NAV lending is essentially a loan taken on at portfolio level based on net asset value, rather than putting debt onto a single company.
Juliet Clemens, analyst at PitchBook, expects to see a steep rise in demand for NAV financing, according to conversations she is having with lenders.
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“Typically they weren’t super popular, they were primarily used for very diversified secondaries and credit funds; sometimes real estate funds,” she said.
But she expects their rise to continue, not just in buyout but in places like infrastructure portfolios as well.
A Haynes Boone study published in February found that 37 per cent of NAV financings were implemented across buyouts and 23 per cent were in infrastructure. The same study found that tenors of NAV facilities have shortened, with 58 per cent over one to two years.
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“The market is not new, it’s existed for a number of decades,” said Pavol Popp, portfolio manager at Pemberton Asset Management.
“What we’re seeing right now is a structural shift. Some of that business is slowly moving away from banks to alternative providers.
“I don’t expect the supply demand mismatch will get any smaller any time soon. That mismatch will grow, that’s what’s creating this interesting market opportunity for us.
“There are around $2.5tn in assets in the buyout industry available for financing, and we estimate that only around 15 per cent is using NAV facilities.”
For Stephen Quinn, senior managing director at 17Capital, part of the rise in interest is due to greater awareness, and part of it is because traditional lending sources have either contracted or closed.
“The other trend is the liquidity squeeze within private equity markets,” he said. “It’s quite circular. It affects everyone and it’s predominantly down to exits. Exits take longer and holding periods are probably north of six years, and that’s at historic highs.”
There is increasingly more dedicated capital being raised for NAV lending. Axa IM’s private capital unit is raising a new fund to provide NAV loans, according to Bloomberg, and AllianceBernstein set up a new NAV lending business at the end of 2023.
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Despite criticisms around using NAV financing to return capital to investors, both Popp and Quinn said the majority of the transactions they are seeing are using to support growth, potentially through bolt-on acquisitions, buy-and-build strategies and to support companies that are performing well.
It is only a minority that are using NAV financing to distributions.
‘Another big source of financing particularly over the last three to four years has been to help finance the PE firms themselves,” Quinn added. “Because they want to continue to grow, and promote their people, they want to invest into their new funds. Because of that liquidity squeeze, alternative sources of capital become important.”
The NAV loans are generally quite conservative, with a five to 15 per cent loan-to-value, Quinn said, with managers also wanting to keep the risk very low.
‘Managers only want to take out these facilities when they have a good sense of where they need to make that investment,” he said. “They don’t want to create just a hopeful war chest. It has to be something purposeful.”