NAV Finance 101: The Next Generation of Private Credit

Summary

• NAV finance refers to private capital solutions offered primarily to private equity funds based on the net asset value of their investment portfolios.
• This financing provides non-dilutive capital, mostly in the form of debt or senior equity, to help borrowers enhance liquidity, create additional value, and manage portfolios.
• Assets under management in the private equity market have almost doubled since 2019 to roughly $10 trillion, which is more than triple the level in 2014.
• NAV finance is usually provided during a fund's value creation phase or very late in the investment period when most limited partners' capital has been called.
• NAV loans are typically senior-ranking instruments collateralized by a diverse portfolio of private equity investments with long-dated maturities and floating-rate coupons.
• Loan-to-value ratios for NAV loans are typically low, ranging from 5% to 30%, compared to 35% to 60% for typical middle-market direct lending deals.
• Many assets in the underlying portfolio are expected to be monetized before the NAV loan matures.
• Returns in NAV finance are historically correlated with the growth of the private equity industry rather than the performance of individual assets, resulting in relatively low volatility.
• NAV loans provide portfolio managers with liquidity while enabling them to maintain the equity upside of their underlying investments.
• Fund managers can use NAV loans offensively to fund add-on acquisitions or refinance debt, or defensively to reduce the risk of selling assets at reduced prices during a dislocation.
• NAV loans are senior instruments at the fund level but are structurally subordinated to investment-level creditors.
• Lenders typically only experience a loss if the value of the entire portfolio declines meaningfully, as less than 5% of private equity portfolios created since 1990 reported an investment multiple below 0.5x.
• During the Global Financial Crisis, the average value of private equity portfolios declined by around 25%, compared to decreases of roughly 45% in broad public markets.
• Risk management in NAV lending involves proper underwriting of managers and portfolio assets, including scrutiny of quality, diversity, and strict covenants.
• Common covenants in NAV loans limit additional debt, specify minimum asset numbers, set maximum loan-to-value ratios, and prohibit distributions to investors upon default.
• NAV finance deal flow more than doubled since 2020, rising to approximately $44 billion in 2023.
• Growth in NAV lending accelerated during the second quarter of 2020 when traditional financing channels became unavailable due to the Covid-19 pandemic.
• Appetite for NAV financing continued to rise after private equity activity stalled in early 2022 due to hawkish monetary policy in the U.S., UK, and Europe.
• Roughly two-thirds of private equity investments in 2022 and 2023 were add-ons as managers sought to create value in a challenging financing environment.
• The assets under management of private equity funds beyond their investment period are expected to rise to more than $5.5 trillion in 2030.
• Deal flow for NAV finance represented only 2% of private equity assets under management in 2023, with estimates indicating the market could reach $145 billion by 2030.
• NAV finance activity in North America increased by more than 30% in 2023, while it rose by around 20% year-over-year in Europe.
• Oaktree acquired a majority interest in London-based 17Capital in 2022 to enhance its private capital solutions suite.
• Both firms emphasize risk control, ethical standards, and complementary business models as key drivers of their partnership.