If you’re went on stress to the resource valuations can get decrease implementation, NAV funds are an organic device to handle LP and you may mentor need for exchangeability and as an enhance so you’re able to security capital within the what’s going to more than likely remain a challenging fundraising ecosystem
- Adding Proper 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.
- Financial support Efficiency so you can Investors. 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 Management Companies. 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.
When you’re went on stress for the advantage valuations could possibly get slow down implementation, NAV financing is an organic tool to deal with LP and you will recruit need for liquidity and as a complement so you can equity financial support when you look at the what’s going to more than likely continue to be a difficult fundraising environment
- Aftercare Place. 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 into the house valuations will get impede execution, NAV money are a natural unit to address LP and you may sponsor demand for liquidity and also as an enhance in order to security resource in the what is going to likely are nevertheless a challenging fundraising ecosystem
- Helps Continuation Fund. 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 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.
Market meltdown, conflict and you will interest develops are some of the of many headwinds having areas on coming days/many years. It is the self-reliance off NAV formations as well as their myriad of programs for sponsors you to serve as the best prognosticator having proceeded robust increases.
The message with the article is meant to offer an over-all self-help guide to the topic amount. Specialist pointers is wanted regarding the particular things.