NAV Credit Facilities on the Rise — Evening Brief – 05.16.24
Demand for net asset value (NAV) credit facilities has risen among private equity and other alternative asset managers, who are increasingly turning to alternative lenders to increase liquidity and capitalize on growing investment possibilities.
Fund administrator Citco’s latest findings show a 30% compound annual growth rate in the use of such credit facilities between 2019 and 2023, driven mostly by managers borrowing to create liquidity to support opportunistic investments.
Approximately 85% of NAV facilities have been used for a combination of follow-on investments in existing alternative fund portfolios and general fund and deal expenses. Limited partners employ NAV facilities to generate liquidity as an alternative to secondary sales, avoiding losses by exiting at values below par.
By comparison, less than 15% of NAV facilities have been used to fund distributions to investors, according to Citco data.
The increase in the usage of NAV credit lending is due to a recent decline in acquisitions and IPOs, which has caused alternative funds to hold onto investments for longer than expected. As a result, managers have increasingly relied on NAV for liquidity to continue investing in and supporting the growth of their portfolio companies.
NAV loans are frequently backed by an alternative fund’s investments, which include private equity, venture capital, infrastructure, credit, real estate, and interests in other investment funds.
This jump comes as the Institutional Limited Partners Association, which represents private equity LPs, prepares to submit draft proposals for more disclosures about the use of NAV facilities and possible risks.
Closed-end fund structures, which are commonly utilized by alternative asset managers, are not intended to issue additional equity after the final fundraising round has closed. Borrowing with NAV facilities enables managers to invest optimally to preserve or increase the value of their assets.
As a result, these facilities are an “invaluable safety valve” for alternative investment vehicles, according to Michael Peterson, managing director, Citco Capital Solutions.
Citco offers NAV facilities that typically range from 3% to 20% of suitable collateral inside a fund. Such lending is an important source of liquidity for closed-end funds, especially in volatile markets and at a time when several banks have withdrawn from this space, it added.
“Closed-end funds, or their investors, obtain liquidity at a reasonable cost that allows them to fulfill their fiduciary duties. Lenders receive an appropriate risk-adjusted return, at a prudent loan-to-value with diversified collateral,” Peterson explained.