Net asset value (NAV) financing continues to gain ground across the private equity (PE) industry, with adoption rising on both sides of the Atlantic and lenders reporting a broadening set of use cases beyond the sector’s early applications.

According to Peter Hutton, head of NAV financing at Arcmont, roughly 40 per cent of mid-market PE managers in Europe have already executed a NAV loan.

“There are very few managers today who have never heard of NAV loans or never had at least a few discussions in Europe,” he said, adding that the US remains “a few years behind Europe in terms of adoption,” at around 30 per cent.

He described NAV loans as having become “definitely much more of a standard part of the fund management toolkit,” alongside subscription lines, general partner (GP) financing and continuation funds. The use of NAV loans purely to fund distributions to paid-in capital, once a source of concern, has faded, he said: “It’s bit of an old story.”

Instead, sponsors are increasingly using NAV facilities to extend their ability to keep investing, for example by buying additional platforms during the investment period rather than rushing to raise a new fund, and for capital structure management, including paying down vendor loan notes or junior debt.

“I think that cost of capital and fundraising flexibility are two big drivers to the extent that they can buy some breathing room,” Hutton added.

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David Wilson, partner at 17Capital, said that he continues to see increased adoption from the most sophisticated PE sponsors in both Europe and the US.

The main reason is that it creates investment capacity at the fund level, although there are still some situations where it is used to provide liquidity to limited partners.

“We see a lot of variety in the exact use cases in the money-in deals; whether that’s to create additional firepower for further investment into multiple portfolio companies, or for a specific investment, such as a transformational follow-on or merger and acquisition, a balance sheet recapitalisation, or an acquisition of a last platform investment in the fund,” he added.

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Separately, analysts at KBRA, which published a report on the NAV loan market in July, said the ratings picture across the asset class has remained broadly stable. “Something like 95 per cent of our ratings have been affirmations,” said Tom Speller, co-head of global fund ratings at KBRA, with roughly four per cent upgrades and around one per cent negative rating actions since the agency began rating the sector.

They also observed a modest shift toward more BBB-rated issuance relative to single-A historically, alongside a slight increase in facilities that remain outstanding for longer and the use of more hybrid structures incorporating pledges of uncalled capital.

On the use of proceeds, KBRA said the market has moved decisively away from funding distributions. “It’s much more used these days to help refinance other debts or support an add-on acquisition later in the lifecycle or indeed to acquire a new portfolio company rather than calling capital,” Speller said.

One area where there could be stress is the older vintage funds that are struggling with underperformance and realisations, Speller warned. While Hutton noted that fundraising risk one thing they are watching, as well as the incentivisation of the GPs, “especially with the rise of continuation funds, that’s created an interesting dynamic”.

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