How NAV financing can help CFOs unlock growth opportunities

By Emma Crabtree, Group Chief Commercial Officer, and Justin Partington, Global Head of Fund and Asset Managers

NAV or net asset value financing enables private equity managers to secure loans against the underlying assets in their portfolios. As the market has grappled with fundraising challenges and delayed portfolio exits, NAV loans have become even more pivotal.

Private equity firms can use NAV lending to finance additional portfolio company expansion, provide cash injections to portfolio companies that may require further investment or, in a small number of cases, facilitate distributions to investors.

The valuation spread gap in the current market has also driven demand for NAV financing. According to Capstone Partners’ 2024 liquidity options survey, a meaningful 12% of general partners (GPs) now say they’ve used NAV financing, with another 14% indicating that they plan to do so this year. 17Capital, a pioneer and leading NAV lending firm, forecasts the market opportunity will rise from $100bn today to $700bn by 2030.

What are the benefits of NAV financing for CFOs?

The main benefit of using NAV finance is its ability to increase investment capacity. If used properly and thoughtfully, these loans can be highly accretive for investors in the fund and can prove to be an agile and massively beneficial tool within private markets.

Additionally, bespoke NAV loans can be quicker to arrange and execute than a traditional secondaries sale, making them a speedier route to liquidity. For example, transferring a book of up to 50 LP interests can take many months while transactions can be completed in a matter of weeks using NAV financing.

Another advantage of a NAV loan is that as the financing consists of debt rather than equity, the borrower does not forgo future upside on the asset.

Risk mitigation in NAV financing

NAV lending can ramp up leverage and change the way in which risk needs to be evaluated. According to a survey by global advisory firm Asante Capital conducted last quarter, 40% of LPs said the increased risk due to leverage that such loans may bring was their biggest worry.

However, there are several factors that mitigate this concern, as follows.

First, NAV loans are typically made in the value creation stage of the fund life cycle once the funds have owned the companies for a few years and they’ve naturally de-leveraged. It’s a less risky entry point as the manager can assess whether their investment thesis is working.

Second, private equity managers are highly experienced in using leverage, with many having done so successfully for more than 30 years. NAV lenders tend to lend in a range of 5 to 20 percent LTV versus the traditional lending range of 35 to 60 percent for mid-market businesses. The reduced leverage directly reduces default risk.

Third, NAV lenders also often have deep, platform relationships and, in the event of financial distress on a loan, they are motivated to seek remedial action that avoids enforcement procedures and enables a positive outcome in the long-term for all parties. Borrowers also often have extended cure periods of 12 to 18 months to remedy covenant breaches, providing flexibility for restructuring or for obtaining alternate financing.

How can NAV financing be used responsibly and transparently?

As the popularity of NAV financing grows, so too must the education around these tools. The Institutional Limited Partners Association, the industry body, is already currently putting together guidance that will provide a shared set of expectations and recommendations for LPs and GPs around the use of NAV facilities.

A June survey from private equity fundraising advisory firm Rede Partners shows that comfort levels are high, with only 10% of LPs polled stating that they do not think GPs are providing sufficient information and disclosure on NAV facilities.

All the evidence shows that NAV financing is being used to stimulate growth and maximise value, rather than distributions to investors. According to a study by 17Capital of transactions totaling more than $38bn, more than 90% of the capital provided for the transactions was used to finance growth and maximise value. Indeed, given current levels of dry powder, injecting more capital into an asset is an option for most GPs should it be required, though may be a last resort given the dilution effect on returns.

NAV financing is a versatile and nimble tool and, if it’s used responsibly and disclosed fully to investors, then all parties stand to greatly benefit.

This article was originally published as an interview in Private Funds CFO. You can read it here. 

About the authors

Emma is IQ-EQ’s Group Chief Commercial Officer, based in London. With over 26 years of experience in financial service institutions, Emma has an established track record of delivering commercial business value in senior executive positions across the industry. She is passionate about sales, relationship building and focused on nurturing and expanding relationships with existing clients as well as diversifying the business mix by attracting new clients.

Justin  is IQ-EQ’s Global Head of Fund and Asset Managers, based in Luxembourg. Justin has international experience in the alternative fund services sector, including senior postings in Canada, UK, the Cayman Islands and Guernsey. He’s an expert in the operation, delivery and marketing of fund and investment administration in the alternative asset space.