For the past number of years, there has been a progressive interest in, and execution of, portfolio financing transactions. This started with preferred equity and has now led directly on to NAV-based loan facilities.
At present there is a lot of talk about, and interest in, NAV-based financing; however, there are still very few providers dedicated to this space. We therefore thought it would be helpful to give you an up-to-date overview of the NAV-based fund financing market and how it can become an integral part of a GP’s toolkit, helping it to optimize portfolio performance and achieve the best outcome for investors.
As you consider how your firm can benefit from these structures, we would love to be part of the conversation and share our expertise and experience.
Why do funds use NAV- based financing?
Nav-based financing is a means of:
- accessing additional capital to grow assets;
- providing immediate liquidity to investors via accelerated distributions to LPs (possibly in the form of recallable distributions);
- managing portfolio company indebtedness; or
- a combination of the above.
The recourse of these facilities is limited to the assets of the fund, without any recourse to LP commitments. One of the key advantages is that these financing solutions are bespoke to a counterparty’s needs and structured to align GP and LP interests, achieving a positive outcome for all parties.
The financing provided is also often a cheaper alternative than other sources of capital (e.g. HoldCo PIK instruments) and is available even at the end of an investment period when liquidity and subscription line financing is no longer available. from these structures, we would love to be part of the conversation and share our expertise and experience.
Despite the benefits of NAV-based financing, what will my LPs think?
Many of the world’s leading, top quality GPs either already have, or are planning to, execute NAV-based fund facilities. These blue-chip GPs view these facilities as an established tool in their portfolio management tool kit. Pursuing fund-level financing of this nature no longer makes you an outlier, wondering what reaction your LPs may have.
From our experience over numerous transactions, most LPs are open to innovation and welcome prudent portfolio management, having seen multiple iterations across their portfolio. This means that if you have a good relationship with your investors and your performance is good, the conversation can be easy. We often receive positive feedback regarding LP reactions.
For example, we recently completed a €300mn loan where the GP sent the money back to its LPs, deemed it recallable, and has now an efficient war chest for future opportunistic investments in the fund portfolio. The reaction of LPs was positive.
How do providers of NAV-based financing differ?
There are only a few providers of NAV-based portfolio financing out there and many of those that purport to offer the product are not able to present the same advantages that can be provided by 17Capital, a dedicated portfolio finance specialist.
Key terms and points of differentiation:
17Capital is able to take a pragmatic approach to LTV (up to 30%) while traditional lenders tend to be more comfortable in the single digit range.
17Capital does not require defined amortization schedules as it understands that a private equity manager will want to manage liquidity of its investments in the best interests of its investors and not because of arbitrary loan repayment dates.
- Repayment/Cash sweeps:
Unlike traditional lenders who want to have the majority of distributions to be used to repay the facility, 17Capital takes a flexible approach to cash sweeps. This more flexible approach to cash sweeps enhances the efficacy and attractiveness of the facilities.
Not constrained by strict bank-like restrictions like many traditional lenders, 17Capital is able to take a flexible and pragmatic approach to covenants and security.
While traditional lenders often prefer shorter dated facilities, 17Capital is able to work with managers requiring longer tenors (including providing extension options at the manager’s discretion).
17Capital has considerable access to dedicated pools of capital for such facilities (together with co-investors) and has executed almost $1bn in 2020 alone (including a recent €300m NAV-based loan facility to a European manager). Traditional lenders often have hold limits which require further syndication.
- Fixed vs floating rates:
17Capital is able to meet manager’s preference on the form of interest rates (fixed or floating). Traditional lenders often require floating rates or seek to pass through hedging costs on fixed rate early repayments.
- Valuation rights:
Traditional lenders often impose arbitrary valuation triggers based on internal bank risk models (e.g. public market proxies which can adjust LTV/NAV calculations). 17Capital is not constrained by these bank risk models and is able to take comfort from the same protections that investors who have entrusted the manager rely upon.
Why partner with 17Capital?
17Capital is the global go-to source of strategic finance for investors in private equity with the largest dedicated fund finance team in the world, bringing together experts in banking, leveraged finance, secondaries, and fund finance into one creative and experienced team. Our expertise and experience mean we can take a flexible and tailored partnership approach to lending to a fund; viewing ourselves as investors partnering with managers.
As illustrated above, unlike traditional lenders, 17Capital’s transactions can be implemented at higher LTV levels, with fixed or floating rates, extendable tenors (at the manager’s option), more flexible level of diversification and with timing of cashflow sweeps to optimize returns to your investors.
Because 17Capital has a large dedicated pool of capital for NAV-based portfolio financing and has executed nearly 60 transactions, we can offer experience, efficiency, certainty and speed of execution.
17Capital will be happy to share our experiences and would love to be part of the conversation as you consider how these structures can help you and your investors.Contact us
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