Web asset worth (NAV) financing is broadly accepted by restricted companions (LPs) whether it is used for ‘money-in’ methods however not for distributions, new analysis has discovered.
NAV financing is when a mortgage is taken on at portfolio degree primarily based on web asset worth, moderately than placing debt onto a single firm.
It’s a fast-growing space of the non-public capital house, with non-public fairness funds taking out NAV loans to spice up liquidity.
Learn extra: ADIA to anchor $1bn Pemberton NAV financing technique
“There are lots of use instances for the proceeds of NAV financing, however these may be grouped into two core sorts: ‘money-in’ (to finance new add-ons, new platform investments, or to refinance asset-level debt) or ‘money-out’ (dividend recap on the fund degree to spice up DPI),” mentioned a report from advisory agency Rede Companions.
“LPs are rational individuals within the non-public fairness ecosystem, and if a NAV financing represents cheaper leverage to attain desired portfolio administration outcomes, the answer will probably be thought-about favourably. LPs are most probably to be supportive if the funding case is sound, pursuits are aligned and implementation follows greatest observe.”
The report discovered that 53 per cent of LPs are constructive or impartial about utilizing NAV financing for brand spanking new platform investments, whereas 86 per cent really feel equally about add-on investments.
Nonetheless, traders had been much less eager on NAV financing when used for distributions, regardless of liquidity issues, with simply 38 per cent of LPs viewing NAV financing for fund-level dividend recaps positively or neutrally.
Learn extra: Increase in NAV financing set to proceed
“The use case for NAV financing services inside non-public fairness buyout funds is multi-faceted and nuanced,” mentioned Magnus Goodlad, associate and head of Rede’s transactions staff.
“It isn’t enough to use a broad-brush method to summarising market notion in direction of this liquidity answer. The report exhibits that while there are a number of areas the place market individuals can enhance there may be additionally a number of constructive sentiment round the usage of NAV financing if the method is performed transparently, with sound judgement and a robust rationale.”
NAV financing is a booming market, with 17Capital projecting volumes to go from $100bn (£78.2bn) to $700bn by 2030.
Its speedy progress has triggered issues from the Financial institution of England, attributable to opacity across the amount of leverage coming into the system.
In a speech made at Bloomberg’s workplaces, Nathanael Benjamin, the Financial institution’s govt director for monetary stability technique and threat, famous that the sort of financing has been termed “leverage on leverage. You’ll be able to see why.”
“There are pure questions concerning the dangers of those financing preparations, and the expansion in sorts and amount of leverage, or ‘leverage on leverage’, all through the ecosystem,” he mentioned.
