While you are went on tension with the advantage valuations get slow down implementation, NAV fund try a natural device to address LP and you can mentor need for exchangeability so when an enhance to help you equity money from inside the what’s going to more than likely are nevertheless a challenging fundraising ecosystem
- Incorporating Strategic Investment. We commonly see NAV loans structured in connection with the addition of strategic investments by a fund. These loans can be structured to provide acquisition financing, or to provide back-leverage to a fund to finance the equity portion of its acquisition costs for the particular investment(s). Such facilities are typically used later in the investment cycles of funds once capital commitments have largely been called or are no longer fully available.
- Resource Productivity so you’re able to Buyers. As average hold periods for private equity portfolios increase, there is continued pressure on sponsors to monetize their investments and provide liquidity to their investors. As a result, a common use of NAV loans is for sponsors to borrow at the fund level to return capital to investors. Lenders are repaid later after realization events with respect to one or more investments of the funds. In this instance, a NAV loan allows the fund to return capital to its investors in advance of one or more realization events with respect to its investments.
- Funding to possess Administration Businesses. General partners and management companies use NAV loans for a range of purposes, including working capital, funding increased investment in the funds that they manage, payment of taxes, payment of bonuses, technology upgrades, distributions to owners, and succession planning (i.e., transferring ownership interests in managed funds from founders to the next generation of investment professionals), to name a few. Such facilities s from the funds or by equity in in the funds.
If you’re went on pressure into advantage valuations get decrease implementation, NAV funds was an organic equipment to handle LP and you can sponsor need for exchangeability so that as a supplement in order to collateral capital in what will more than likely will always be a challenging fundraising environment
- Aftercare Institution. For funds with ongoing liquidity needs after the expiration of their investment periods, some lenders will agree to extend a fund’s existing subscription line facility subject to certain supplemental credit enhancements, including adjustments to the borrowing base to increase borrowing capacity (e.g., a substantial increase in the borrowing base from a traditional blended advance rate of 50% up to 90% is not uncommon). In return for this increase to the borrowing base availability, lenders will typically require the implementation of NAV-style covenants to mitigate against the reduced primary source of collateral and repayment in the form of uncommitted capital for these facilities and look “downward” at the asset value of the fund’s investments. See our colleague Chad Stackhouse’s in-depth discussion of these types of facilities here.
While proceeded stress toward advantage valuations could possibly get decrease execution, NAV loans try a natural tool to address LP and you will mentor interest in liquidity and also as an enhance so you’re able to collateral resource into the what is going to likely are still a challenging fundraising ecosystem
- Support Extension Money. The use of financing for continuation funds has received a lot of press as of late. A continuation fund will be set up to transfer assets from an existing fund. The investors in the existing funds can elect to either be cashed out of the investment or to roll their equity into the new fund alongside new and existing investors. The purchase payment by title loans Lenoir City TN the continuation fund for the transferred asset(s) (which is used to pay out exiting investors) may be funded in part using debt under a NAV loan.
Recession, conflict and you can interest rate expands are some of the of several headwinds for markets throughout the coming days/age. It’s the independence out-of NAV formations as well as their numerous programs getting sponsors one serve as the best prognosticator having went on sturdy growth.
The message for the blog post is intended to promote a standard guide to the subject amount. Specialist recommendations are going to be needed regarding your certain activities.
