NAV and GP financings are on the rise 3 min read
It was a pleasure to attend the Fund Finance Association's annual APAC Fund Finance Symposium in Hong Kong, and be part of a wide-ranging conversation about the latest developments and dominant trends. In this Insight, we share our key takeaways.
NAV financings ascendant (particularly private credit)
- Continued low fundraising, challenging exit environments and longer hold periods are leading to a notable growth in net asset value (NAV) financings, alongside continuation funds and single-asset back-leverage arrangements.
- There is significant competitive tension in this area, with new entrants to the market. Pricing and structures are aggressive, and borrower-friendly loan-to-value ratio ratios and asset criteria have been common.
- The most interest has been in private credit NAVs (see our earlier Insight on the key negotiation points for these facilities).
- Sponsors are seeing NAV facilities as a cheaper and more flexible tool, which allows borrowings for broad purposes (including working capital and limited partner (LP) distributions).
- Borrowing limitations within fund constituent documents that restrict NAV borrowings are becoming rarer, with greater buy-in from both LPs and general partners (GPs) into the NAV facility product.
PE NAVs forthcoming
- Participants' discussions suggest there will be an uptick in NAV facilities for private equity (PE) in coming years.
- The product is evolving from a bridging tool used for specific purposes (such as bolt-on acquisitions or fixing capital structures of underlying portfolios) to more general purpose borrowing.
- Interest in PE NAVs extends to funds holding both diversified and concentrated portfolios. Assessments of cashflow, quality of the GP, and sponsor capacity to liquidate the assets where required are key financier considerations.
Demand for GP facilities increasing
- Traditionally a relationship product, GP financing is now becoming more prevalent generally.
- These products are predominantly used to meet GP needs to fund GP co-investments (as investors require more GP buy-in into investments), but are also implemented for general liquidity and warehousing / acquisition purposes.
- The security package is bespoke from transaction to transaction. Lender analysis depends on the GP's net worth and its relationship with the GP, the GP's track record, the governance of the fund, and legal due diligence on the ability to assign / take security over the management fee and/or carried interest.
More HNW / family office investors
- There is increased prevalence of high net worth / family office investors, particularly in the lower and mid-cap funds, in light of the difficult fundraising environment.
- At present, financiers address inclusion of such investors in the borrowing base in different ways. Certain lenders will not bank against these investors and exclude them from the borrowing base. Others are willing to provide borrowing base credit, but incorporate hurdles or lower advance rates, and only do so where there is sufficient buffer from institutional investors.
Sell-down / securitisation of fund finance books
- Financiers are increasingly selling down their participation in fund finance facilities to third parties, including non-bank financial institutions.
- Their motivations for this include changes in commercial strategy, regular recycling of capital, or meeting investor demands for exposure to such products through securitisation-like transactions.
- Capital requirements have led to greater financier interest in securitisation / risk participation of their fund finance books. Global take-up of similar capital requirements may cause similar developments in coming years in the APAC region.
- How the Australian market will address securitisation of subline facilities (which are predominantly revolvers) remains to be seen, with securitisation structures historically favouring term facility arrangements.
If you have any questions about the takeaways in this Insight, please feel free to get in touch with us.