Evening Brief – 03.03.23

As general partners start exploring alternate sources of liquidity, market acceptance of net asset value (NAV)-based lending in the private equity sector is increasing more than ever.

The pandemic accelerated the use of NAV financing and has impacted both short-term and medium-term growth prospects of portfolio companies. This in turn has delayed company exits and impacted fund liquidity and distribution. Fund managers are resorting to specialty borrowing options such as NAV facilities to tide the situation.

The NAV credit facility, “a little-known institutional financial product,” according to the Citco group of companies (Citco), grew roughly 30% annually across its client base between 2019 and 2022, while secondary trading grew 7% annually over the same period.

Growth in 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.

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.