Investors wary on NAV financing for distributions
Net asset value (NAV) financing is widely accepted by limited partners (LPs) if it is used for ‘money-in’ strategies but not for distributions, new research has found.
NAV financing is when a loan is taken on at portfolio level based on net asset value, rather than putting debt onto a single company.
It is a fast-growing area of the private capital space, with private equity funds taking out NAV loans to boost liquidity.
Read more: ADIA to anchor $1bn Pemberton NAV financing strategy
“There are many use cases for the proceeds of NAV financing, but these can be grouped into two core types: ‘money-in’ (to finance new add-ons, new platform investments, or to refinance asset-level debt) or ‘money-out’ (dividend recap at the fund level to boost DPI),” said a report from advisory firm Rede Partners.
“LPs are rational participants in the private equity ecosystem, and if a NAV financing represents more cost-effective leverage to achieve desired portfolio management outcomes, the solution will be considered favourably. LPs are most likely to be supportive if the investment case is sound, interests are aligned and implementation follows best practice.”
The report found that 53 per cent of LPs are positive or neutral about using NAV financing for new platform investments, while 86 per cent feel similarly about add-on investments.
However, investors were less keen on NAV financing when used for distributions, despite liquidity concerns, with just 38 per cent of LPs viewing NAV financing for fund-level dividend recaps positively or neutrally.
Read more: Boom in NAV financing set to continue
“The use case for NAV financing facilities within private equity buyout funds is multi-faceted and nuanced,” said Magnus Goodlad, partner and head of Rede’s transactions team.
“It is not adequate to apply a broad-brush approach to summarising market perception towards this liquidity solution. The report shows that whilst there are a lot of areas where market participants can improve there is also a lot of positive sentiment around the use of NAV financing if the process is conducted transparently, with sound judgement and a strong rationale.”
NAV financing is a booming market, with 17Capital projecting volumes to go from $100bn (£78.2bn) to $700bn by 2030.
Its rapid growth has triggered concerns from the Bank of England, due to opacity around the quantity of leverage entering the system.
In a speech made at Bloomberg’s offices, Nathanael Benjamin, the Bank’s executive director for financial stability strategy and risk, noted that this type of financing has been termed “leverage on leverage. You can see why.”
“There are natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem,” he said.
