NAVigating new PE opportunities

In today’s environment of high interest rates, inflation and economic uncertainties coupled with limited access to capital for new investments, refinancing or inter-fund lending, net asset value (NAV) lending emerges as a strategic alternative for investors seeking stability and opportunity.

This type of strategic financing enables PE funds to unlock liquidity by leveraging the value of their portfolio. It allows general partners (GPs) and limited partners (LPs) to access liquidity without prematurely exiting positions or compromising long-term returns.

Traditionally used by debt and secondary funds due to their consistent cash flows, NAV financing has now been adopted across fund types. 

In NAV lending, a fund or vehicle owning a diversified underlying portfolio of companies secures a loan based on the value of its investments. The amount of financing is usually decided based on a percentage of the portfolio's NAV and repaid using cashflow from the portfolio through sale of that company holding.

Lenders, especially institutional investors, are increasingly opting for NAV lending because of a trifecta of advantages - attractive risk-adjusted returns, portfolio diversification and structural protection in the market.

While the US banks’ appetite for NAV lending has reduced in recent times due to tighter capital rules, insurers face less stringent regulations and are hungry for high yield, long-term assets - making NAV loans a perfect fit.

Athene, the insurance arm of Apollo Global Management Inc, is a leading insurer in NAV lending. It has invested ~$760 million in NAV loans made to Tiger GlobalX’s venture capital funds. It has also acquired a $93 million interest in a five-year NAV loan that Goldman Sachs Group put together for Vista Equity Partners Fund VII.

About 20 insurers, including Pacific Life, Allianz Life and Protective Life, have invested in NAV loans to PE funds. In 2023, investment management firm AllianceBernstein LP launched the AB NAV Lending platform with an anchor investment from insurance firm Equitable Holdings Inc.

Blue-chip firms have not been far behind. According to Bloomberg, Blackstone Inc intends to borrow more than $1 billion against investments in an older PE fund to fund reserves and support portfolio companies.

NAV lending is ideal for mature PE funds that have deployed most, or all the capital committed by investors. Funds usually deploy proceeds from NAV financing to boost returns by investing in strategic opportunities, such as:

• Facilitating new investment: NAV loans provide PE funds the liquidity to make new strategic investments, such as acquisitions at existing portfolio companies, to drive growth and value 
• Fund restructuring and extension: NAV loans enable GPs to restructure their funds or hold onto assets that require time to mature or adjust strategy to maximise returns
• Supporting portfolio companies: The loans can support portfolio companies facing expiring credit, providing them capital at lower rates and helping them avoid refinancing risks

However, it is a matter of concern when private equity funds use the proceeds for money-out transactions that fail to create value, such as:

• Early capital return to LPs: PE funds can utilise the NAV finance to return capital to LPs earlier than usual, enabling them to rebalance portfolios or meet their investment needs, while also increasing the fund's internal rate of return
• GP commitment financing: GPs can use NAV loans to meet capital commitments to their funds, demonstrating their alignment of interests with LPs and fostering the fund’s credibility 

The NAV lending market has roots in 2008, when 17Capital pioneered this solution. The market’s future growth dovetails with the ongoing expansion and transformation of global PE funds, whose assets under management have increased ~15% over the past decade. Notably, the assets of PE funds that have moved past their investment phase - the primary users of NAV loans - is projected to exceed $5.5 trillion by 2030.

Given the above, and the rising interest of investment management firms and institutional investors, NAV lending has significant growth potential. Current projections estimate a $600 billion market opportunity compounding at an annual growth rate of 25% by 2030.

With PE buyout firms holding over $3.2 trillion in unrealised value across more than 28,000 unique companies, according to Bain & Company Private Equity Outlook 2024, the industry is too diverse for a one-size-fits-all approach to financing. Traditional corporate finance tools alone are insufficient, and the rise of NAV lending reflects the shift. 

While NAV lending initially gained traction in Europe, its adoption has accelerated in North America as well, surging over 30% on-year in 2023 against 20% in Europe. The reason lies in the more mature PE market in the US and its greater demand for liquidity amid slower exits. Moreover, US fund managers have quickly embraced NAV lending, supported by a robust private credit sector and reduced bank lending, enabling faster and more flexible financing. In contrast, Europe’s smaller market and greater reliance on traditional banks have slowed adoption. 

Given their advantages, NAV loans will play an increasingly important role in the evolving PE industry as a key tool for delivering outstanding returns and staying competitive in a rapidly changing landscape.

However, both LPs and GPs are still building familiarity with the product even as best practices continue to evolve. The Institutional Limited Partners Association recently came up with new guidance for the judicious use of NAV loans that benefit all stakeholders. The guidance broadly focuses on transparency, legal considerations and due diligence along with key focus areas for LPs. 

At Crisil Integral IQ, we specialise in helping PE investors navigate a complex regulatory and macro-economic environment with confidence. Whether it is active monitoring of a portfolio crucial to minimise default risk, optimise cross-border portfolio strategies or model the macroeconomic impact, our tailored insights and analytics empower smarter decisions.