A Shift in Sentiment? Growing Adoption of NAV Loans Amid Liquidity Pressures Stirs Up the Finance Landscape

Finance Investors are displaying a significant shift towards net-asset-value (NAV) loans, a tool once mired in controversy. Amid a sluggish M&A landscape and an extended exit drought, perspectives on NAV loans appear to be changing. According to Shana Ramirez, head of the fund finance team at Katten Muchin Rosenman, NAV facilities are currently in vogue.

General Partners (GPs) usually leverage NAV loans against a pool of assets within a fund to fuel new investments and to bolster the growth of their portfolio firms. These loans can also be employed to make premature distributions to Limited Partners (LPs). However, these loans have sparked concerns in the past because they could expose LPs to hidden risks and obscure the real health of a portfolio.

As investors become more receptive, a wave of new entrants - banks and non-bank lenders alike - have ventured into the NAV financing market over the past two years. This has sparked increased competition and more favorable pricing and terms. The rising financing options have empowered borrowers to negotiate more favorable terms, such as competitive pricing, relaxed covenants, and less stringent collateral requirements.

However, this rising enthusiasm for NAV loans contrasts with the resistance seen two years ago. If the fund’s assets’ value declines, triggering a loan default, lenders can push for repayment ahead of distributions to LPs. NAV facilities may also instigate cross-collateralized risk to investors. While it may be more economical to take out a NAV loan to support a portfolio, if an investment within the fund fails, lenders can seize proceeds from other high-performing assets to recover their losses, thus diluting returns for LPs.

Emphasizing the recent surge in NAV loans, Brian Hoehn, director of industry affairs at ILPA, stressed the importance of maintaining transparency. He proposed GPs communicate extensively to LPs about the use of NAV loans and their inherent risks.