Funds begin using unsecured NAV financing
Net asset value (NAV) loans are increasingly being used by general partners at a time of limited exits in an effort to obtain some liquidity.
Although still a small part of the industry, NAV loans have become more popular recently, with several asset managers launching dedicated funds to take advantage of the opportunity. While most of these loans, that are provided at fund level, are secured by the assets in a portfolio, industry insiders say instances of unsecured loans are also increasing.
“The unsecured structure provides a greater level of flexibility to the borrower,” said Magnus Goodlad at Rede Partners. “They’re perceived to be a lower risk transaction. In the event that there’s a default, then the consequence is less severe.
Read more: Exclusive interview with 17Capital’s Stephen Quinn on NAV finance
“It can’t bring about the extreme requirement to realise an asset and therefore in our NAV financing report, what the lenders expressed is that if there’s a tension between the cost of capital and flexibility, then a majority had a preference for a greater level of flexibility.”
Although for the lenders it might mean higher risk, it can also provide higher returns.
It is also important to note that these loans are not fully unsecured as some will be secured against the bank account of the borrower where any distributions will go into.
Read more: Pemberton confirms first close at over $1bn for NAV financing fund
“Whilst there is increasing talk about unsecured NAV financings, it is not something we have yet seen becoming prevalent in the European market,” said Ian Callaghan, corporate and structured lending partner at Linklaters.
“The first point to note when referring to unsecured NAV financings is that it is something of a misnomer because there will typically still be bank account security granted, even in so-called ‘unsecured’ NAV financings.
“For a lender trying to get comfortable with a PE NAV financing which doesn’t benefit from any share security, as well as insisting on lower LTVs, they would need to form the view that, as long as they have a debt claim into the fund or an SPV which sits above the whole portfolio and they have security over accounts into which distributions and realisation proceeds from the portfolio companies have to be paid, then, in a default scenario, they would have sufficient leverage to compel that entity to cooperate with realising the assets in order to repay the debt.”
He added that often in PE NAV financings, after a default, there will be a period, during which the lender and the borrower or sponsor are obliged to try to agree a workout plan.
Read more: BoE sounds the alarm on NAV financing
“So the borrower/sponsor would be obliged to discuss with the lenders a plan for selling down assets and repaying some of the debt and come up with a strategy and a timeline for that to be implemented,” he added. “Other than in the case of certain events of default – such as payment default or insolvency – it’s only once that process has been gone through that the lenders are permitted to accelerate and enforce the security. That feature reflects a commercial acceptance that, where you are lending against illiquid, privately held assets, it may in any case be difficult and value destructive to enforce security and sell assets quickly and without the cooperation of the sponsor.
“Once you’ve accepted that, you can see it opens the door to arguments about whether the share security is needed at all. That being said, in our experience, most lenders still want to have the ultimate fallback of being able to enforce security so they can take matters into their own hands.”
Read more: NAV finance market forecast to grow to $145bn by 2030
