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We continue to see significant interest in NAV financing products in both the U.S. and European markets, which is reflected in double digit year-over-year growth in our deal activity for these facilities to date. As compared to years past, there has been a noticeable uptick in new lenders willing to provide NAV financing (including both banks and private lenders). In mid-2020, at the outset of the pandemic, the spike in interest in NAV lending from sponsors was anecdotally explained by (i) sponsors being hesitant to call capital from LPs during the uncertainty of the pandemic and (ii) the inability of private equity-backed companies to obtain affordable financing during the disruptions caused by COVID shutdowns. Nonetheless, as these pandemic effects continue to fade and we shift to a very different macroeconomic environment, the demand for NAV lending remains strong. Below is a high-level summary of some of the key features of NAV loans, many of which are the focus of our conversations with clients.
The allure of NAV loans isn't that NAV lending provides a silver bullet to a particular issue faced by the alternative investment market at-large. Rather, it's that NAV loans can be structured/tailored to address any number of issues. It's this flexibility that drives the value of this product to both sponsors and investors (and keeps loan structurers and their lawyers alike on their toes and up late at night).
To illustrate this from the perspective of outside counsel, a typical request that we often get from lenders that are interested in exploring adding NAV loans to their product offering is to provide them with a sample term sheet to review. Since NAV loans aren't a one-size-fits-all product, there isn't yet a truly one-size-fits-all term sheet. Instead, to start putting together the skeleton of a term sheet for a NAV loan you would need to know the following (among other things):
(i) what is the structure of the borrower, and where in the structure will the financing be provided;
(ii) is the facility a revolver or a term loan (or a combination thereof);
(iii) is the borrower a hedge fund, private equity fund, private debt fund, secondaries fund, family office, etc.;
(iv) is the facility secured or unsecured;
(v) what are the underlying assets, and what obstacles apply to the pledge and potential foreclosure of such assets;
(vi) what is the holding structure for the investments and what jurisdictions are implicated;
(vii) how will the underlying assets be valued and what rights will there be to obtain independent valuations;
(viii) what is the lender's approach to borrowing base eligibility, concentration limits, etc.;
(ix) are there co-investors and where do they enter the structure;
(x) will there be a bullet repayment or an amortization based on cash flows, LTV, time to maturity, etc.;
(xi) will there be additional credit support provided, such as pledges of capital commitments, guarantees or equity commitment letters from parent funds;
(xii) will the facility be used to finance an acquisition or are the underlying assets already owned;
(xiii) is the investment portfolio static (i.e., pre-approved portfolio) or dynamic;
(xiv) and does the borrower have other creditors.
When we discuss NAV loans with clients that are new to the space, we generally describe such loans as falling into several broad categories:
We also typically highlight common uses for such loans, including:
Recession, war and interest rate increases are among the many headwinds for markets in the coming months/years. It remains to be seen how the macroeconomic and political environment will affect sponsor appetite for NAV loans. While continued pressure on asset valuations may slow down implementation, NAV loans are a natural tool to address LP and sponsor demand for liquidity and as a supplement to equity capital in what will likely continue to be a challenging fundraising environment. It is the flexibility of NAV structures and their myriad of applications for sponsors that serve as the best prognosticator for continued robust growth.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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