NAV Credit Facility: “A Little-Known Institutional Financial Product” Is Gaining Traction Among Alternative Funds
Growth in Net Asset Value (NAV) credit facilities has increased “exponentially” in importance among private equity and other alternative investment funds since the pandemic relative to the secondary trading of assets as a means of creating liquidity, according to the Citco group of companies (Citco).
The NAV credit facility, “a little-known institutional financial product,” according to Citco, grew roughly 30% annually across its client base between 2019 and 2022, while secondary trading grew 7% annually over the same period.
Like an asset-backed facility, an NAV facility is a loan that provides a fund with leverage based on its portfolio of assets and serves many purposes from providing working capital to finance growth to making follow-on acquisitions to distributing profits to investors.
According to Citco, the facility is now growing in importance as it has the benefit of generating interim liquidity, allowing the assets to be realized in an “orderly manner over time.” In turn, asset sales have become challenging as global central banks tighten financial conditions, with data from Pitchbook revealing that the exit-to-investment ratio for private equity firms hit a 10-year low in 2022.
Citco says that typically funds borrow to generate liquidity and deploy additional capital after the commitments from their investors are exhausted. An alternative use of a NAV loan is when institutional investors seek incremental leverage on their limited partnership holdings in alternative funds. Historically, institutional investors have tended to use this type of loan to generate liquidity when the cash flow from their LP portfolio is expected to slow.
The size of NAV facilities globally is estimated to be less than $100 billion, according to data from The Fund Finance Association, which represents under 1% of the estimated value of private capital investments.
The average US PE buyout holding period lengthened last year and is expected to lengthen further in 2023 as fund managers wait for asset pricing to recover. As holding periods lengthen, NAV financing as an option is likely to gain importance. Based on current growth rates, Citco estimates the NAV market could grow to over $600 billion by 2030.