NAV financing fills gap as GPs look to increase own commitments
As general partners (GPs) look to increase the amount of commitments they make to their own funds, private credit funds have started picking up the cheque, offering flexible financing solutions to firms, as well as individuals.
“Managers want to invest more in their funds, show their limited partners (LPs) more conviction, and they may also want to open this up across the broader team, rather than just the three to four people at the top of the house,” said David Wilson, partner at 17Capital.
When 17Capital provides such financing it is not usually for the minimum one or two per cent that is stipulated in the Limited Partners Agreements, Wilson said. It is more about helping them to make up to eight per cent or larger GP commitments.
Read more: 17Capital hires JP Morgan MD to grow Middle East presence
He noted that the financing is sometimes for an individual, a team or the management company’s own balance sheet.
The fund typically uses the GP commitment in a previous fund or a different strategy as collateral, though sometimes management fees and carried interest can also be included.
17Capital focuses on buyouts and looks for groups that are established and have a good track record. It does not lend to emerging managers for GP commitments. The average deal size they see is around $200m (£149.5m), but Wilson noted that it can vary quite a bit.
“High performing brand name GPs looking to fuel growth, raise financing for initiatives like buying another manager or launching a new strategy, can use this solution,” he added. “As managers raise different strategies it’s becoming a more balance sheet intensive business. They could also be looking for capital to seed retail or evergreen products.”
Read more: NAV finance market “never been healthier”
Arcmont has also been financing GP commitments, with head of NAV financing Peter Hutton saying that financing at the GP-level has been “relatively starved of capital” with banks being the only real providers. The only alternative has been dilutive equity capital, he said, which is why lending by private credit firms has been growing.
“GPs have deployed a lot since Covid, and as a result, they haven’t yet realised the value creation of those assets yet,” he said. “The rise in interest rates hasn’t helped either. Now, they’re back out raising funds.
Read more: Pemberton raises $1.7bn for NAV financing fund
“Typically, the GP commitment has been one or two per cent. Not only do they often lack the capital to finance that in a larger fundraise, but in an increasingly competitive fundraising environment, LPs are sometimes asking for more skin in the game – more alignment of interest. When given the option, GPs are electing to increase the size of their commitment to three to four per cent, based on the size and value of their own commitments. They are putting more skin in the game, and this results in much broader incentivisation throughout the team.”
