How NAV Lending is Reshaping Private Equity and Private Credit
Net asset value (NAV) lending has grown rapidly in recent years as a way for private equity firms to raise cash as traditional financing has dried up and exits become tougher.
NAV financing allows a GP to borrow against assets held in its funds, typically to fund add-on acquisitions, refinance existing debt or – more controversially – fund distributions to LPs.
According to Citco, the NAV loan market grew roughly 30% annually between 2019 and 2023, while according to S&P Global, there are currently around $150bn in outstanding NAV loans.
Traditionally the domain of banks, private credit managers are increasingly looking to provide NAV financing.
With has covered 11 NAV lending launches so far in 2024, most recently a new $1bn fund from Pemberton Asset Management, anchored by the Abu Dhabi Investment Authority.
| Manager Name | Fund | Size | Date |
|---|---|---|---|
| Qualitas Funds | Qualitas NAV lending JV | €230m | Forthcoming |
| Pemberton Asset Management | Pemberton NAV Financing Fund | $1bn | Jul-24 |
| NLC Capital | NLC Sub-line Financing Fund | - | Jun-24 |
| Hunter Point Capital | Hunter Point Capital GPFS - NAV Lending | - | May-24 |
| Balance Strategic Capital | - | - | May-24 |
| Arcmont Asset Management | - | €1bn | Apr-24 |
| HSBC Asset Management | HSBC NAV Financing Partnership Fund | - | Mar-24 |
| Partners Group | Partners Group Fund Financing Solutions | - | Feb-24 |
| AXA IM Prime | AXA IM Prime NAV Lending Fund | €300m | Feb-24 |
| Alliance Bernstein | AB NAV Lending Fund | $500m | Feb-24 |
| 17Capital | 17Capital Credit Fund 2 | - | Jan-24 |
However, NAV lending’s rise has not come without controversy.
LPs in private equity funds that have taken out NAV loans have raised concerns, particularly over the use of NAV lending to fund distributions to investors, which can artificially boost a fund’s IRR.
Skeptics have referred to this use case as “leverage on leverage,” and have noted that NAV loans often sit senior to LPs in a fund’s capital structure, meaning that as better assets are harvested, lenders are repaid before the fund’s investors.
What does the data say?
According to a survey from Rede Partners, 2023 NAV lending volumes were on course to exceed 2022’s total of $21bn – although since it remains an opaque market, hard numbers on issuance can be hard to come by.
According to data from Hamilton Lane, around 10% of GPs have taken out a NAV loan, while a further 11% are considering it.
Meanwhile, NAV lender 17Capital says that of existing NAV loans, around 89% have been used for “money-in” purposes, such as growth capital or add-on acquisitions, while only 11% have been used for “money-out” purposes, such as funding distributions.
According to a survey of LPs from Rede Partners, “money-in” NAV lending is more popular with PE fund LPs than one might expect: 86% of LPs support NAV lending’s use to fund add-on acquisitions, while 71% are in favor of the practice to refinance existing debt.
By contrast, LPs oppose the use of “money-out” NAV lending by a margin of 62% to 38%. As a result of this strong opposition from LPs, 17Capital says that the use of money-out NAV loans decreased by as much as 90% in the second half of last year.
The GP perspective
To better understand the rise of NAV based lending, its impact on private equity, and the concerns surrounding its use, we turned to 17Capital for insights. They shed light on why NAV lending has surged in popularity, how GPs are addressing LP concerns, and whether this trend is here to stay.
With Intelligence (WI): Why is NAV lending on the rise?
17Capital (17C): NAV lending has been around for over 15 years, but its rapid adoption by private equity funds represents a new phase in the sector’s progression.
The growth in NAV lending stems in part from the underlying growth of private equity - there is currently $3.2tn of unrealised value across 28,00 portfolio companies. It has become increasingly important to access alternative sources of capital to help unlock value to create larger, more successful and more resilient businesses.
NAV lending has been recognised by an increasing number of successful managers as an important tool to help create outcomes that will ultimately deliver better returns for LPs. Given the challenging economic backdrop of recent years, those GPs that deliver successful performance will continue to attract LP capital, so accessing a broader toolkit of portfolio management tools is vital.
WI: How are GPs addressing the concerns of LPs?
17C: Mainly through dialogue, explanation and [validation] that NAV lending is an important tool for growth.
Influenced by headlines rather than evidence in many occasions, some LPs have raised concerns over the use of NAV lending to pay for distributions to investors. Distributions to LPs is the minority use case across the industry. It is not and has never been intended to be the panacea for the record low liquidity we see in the market today. The focus is on growth capital – we believe that is 90% of the use case. Executed well, delivering growth and creating value maintains the alignment between managers and their investors.
It is important and logical that GPs should properly communicate the use of NAV lending to LPs to help explain their intentions – the ultimate goal is to create value and improve performance for investors. If the fund delivers on its performance targets, then LPs will likely be happy.
WI: Is it a fad or here to stay?
17C: NAV lending has now established itself as a highly effective source of capital for a growing private equity industry. NAV lending has demonstrated its credentials and has been an important and effective source of capital, particularly when other financing markets closed. We have no doubt it is here to stay.
The growing number of players in the NAV lending market is evidence of its growing popularity and should also help service the levels of demand for these products as GPs look for ways to add value to portfolios. As adoption among GPs continues to increase and LPs become more familiar with the use cases and merits of NAV Lending, we will see it becoming an important asset class within private credit.
The Future of NAV Lending
NAV lending has emerged as a pivotal tool in the evolving landscape of private equity, offering an alternative source of capital that can unlock significant value. While its rapid adoption has sparked debate, particularly concerning its use for distributions, NAV lending is here to stay. As both GPs and LPs navigate this increasingly popular financing method, open communication and a focus on growth will be key to ensuring that NAV lending continues to drive positive outcomes for all stakeholders involved.