PUBLICATION: NAVigating NAV Financing: LP perception survey and lender market report
We are delighted to publish our latest NAV Financing Market Report 2024. Last year, Rede published our first NAV Financing Report, which was based on proprietary research conducted with NAV lending counterparties and provided market insights and data from a lender perspective. This year, our focus is on the perceptions and sentiments of Limited Partners toward NAV financings, drawing on data and investor commentary from Rede’s 2024 Limited Partner Perception Survey.
Key findings from the report:
NAV financings are more popular amongst LPs than you might think, especially when used for ‘money-in’ strategies…
There are many use cases for the proceeds of NAV financing, but these can be grouped into two core types: “money-in” (to finance new add-ons, new platform investments, or to refinance asset-level debt) or “money-out” (dividend recap at the fund level to boost DPI). LPs are rational participants in the private equity ecosystem, and if a NAV financing represents more cost-effective leverage to achieve desired portfolio management outcomes, the solution will be considered favourably. LPs are most likely to be supportive if the investment case is sound, interests are aligned and implementation follows best practice.
… but LPs may be sceptical if NAV financing is used purely to accelerate distributions (despite ongoing clamours for liquidity)
Rede’s most recent RLI survey showed that the ongoing drought in distributions was LP’s number one concern for the coming year, and liquidity concerns are referenced frequently by investors across the LP landscape. While NAV financings can seem like a simple solution to the liquidity squeeze, GPs should not assume that LPs will automatically support NAV solutions as a way to accelerate distributions. To convince LPs, a clear case must be made based on individual fund circumstances, the current and forecast distribution profile and the GP’s portfolio management strategy.
Cost of capital is a key consideration, but flexibility is paramount
Faced with a delta of only c.100-150bps in spreads between secured and ‘recourse-light’ NAV financing facilities, the majority of LPs polled would prefer GPs to consider greater flexibility and a ‘recourse-light’ facility versus fully secured loans. However, LPs understand that security structures should be considered and determined on a case-by-case basis. Key considerations here are portfolio diversification, leverage and liquidity requirements, facility terms and LTV.
Poor communication during a NAV process carries a very real risk of damaging a GP’s relationships with investors
For GPs considering implementing a NAV facility, clear communication with LPs is crucial to receiving investor support. Our survey highlighted that communication and disclosure is the number one concern among LPs regarding NAV facilities, and c. 60% of LPs believe they are not being provided with adequate information at this time. The legal requirements for disclosure relating to NAV facilities are not as well defined as more established processes such as fund extensions. However, LPs understandably believe that GPs have a moral obligation to communicate their intentions clearly and transparently and to take heed of investor concerns or feedback. Failure to do so can cause serious damage to GP-LP relationships.