Net asset value based credit facilities (“NAV Facilities”) are credit facilities pursuant to which the availability thereunder is based on the net asset value of the investments of the borrower, typically a private fund. The loans provided thereunder are secured by the assets of the fund. Interest in NAV facilities has grown exponentially in recent years. As a result, deal activity and market participants have increased to match this demand.
NAV Facilities offer additional financing opportunities for funds in the later stage of the fund’s life cycle, after capital commitments from investors have been mostly or completely drawn and subscription facilities are no longer a viable option. In addition, NAV Facilities offer alternatives to funds during periods of declining availability or attractiveness of subscription loans, as a result of lack of supply, increased regulation, rising interest rates or other market factors. NAV Facilities offer alternatives to funds with investor bases which make obtaining a subscription facility more difficult. NAV Facilities can be flexible in structure and may be put into place for a variety of asset classes – including private equity, infrastructure, and secondary funds – capitalizing on the value of portfolio assets as collateral for the indebtedness provided thereunder. Funds may find NAV Facilities attractive for a number of reasons, including an alternative source of liquidity, improving returns and performance, cash flow and timing considerations, and overall management flexibility. NAV Facilities allow funds to maintain liquidity and leverage options beyond the fund’s investment period, unlocking liquidity from certain illiquid assets and the ability to leverage assets from a diverse investment base.
Basic Structure
The structure of a NAV Facility may depend on a fund’s structure, investment strategy and investments, and certain regulatory and tax considerations. The terms and structure of the facility is often determined and underwritten on a case-by-case basis. While it can be time consuming, this bespoke structuring also adds flexibility, providing additional financing opportunities and alternatives.
Availability under a NAV Facility is typically limited to an amount equal to the eligible net asset value of a subset of the fund’s investment portfolio which meet agreed upon eligibility criteria, multiplied by applicable advance rates. The eligible net asset value takes into account agreed upon concentration limits. The determination of such eligibility criteria, concentration limits, advance rates and valuation criteria depend on a number of factors and are key components to the selection of lenders and negotiation of NAV Facilities. Eligible investments will generally, among other criteria, not be subject to other liens (other than certain agreed upon permitted liens), and not be subject to adverse credit events, such as insolvency events, write-off, declining performance or declining asset value in excess of certain thresholds, and material breaches relating thereto.
NAV Facilities are secured by the underlying assets of the borrower, whether limited to the eligible assets or a broader collection of assets of the fund. The collateral will be determined on a case-by-case basis, depending on the nature of the assets and limitations which may impact the ability of a fund to provide a first priority perfected security interest therein. The collateral will also include distributions and proceeds from the investments and the accounts into which such proceeds are funded.
NAV Facilities often have a tenor of three to five years and typically include various loan-to-value (“LTV”) triggers, which can lead to mandatory prepayments, cash control and cash sweeps and events of default and pricing adjustments if the LTV falls below specified thresholds.
Key Considerations
As the borrowing base in NAV Facilities centers around the valuation of the investments and the LTV triggers also include such valuation component, coming to a business agreement on how such valuation is determined and overcoming issues relating to the valuation of certain assets can sometimes be a challenge. The valuation determination may take into account several factors, including the fund’s valuation methodology and the lender’s comfort with such methodology, the fund’s historical performance track record, the composition of the investments and the availability of marks thereof, and the frequency of valuations required by the fund’s procedures. Most NAV Facilities will include a mechanic for the lender to challenge the valuation under certain circumstances and allow for lender valuation or require third party valuation in such circumstances. Such circumstances and valuation mechanics are often extensively discussed by borrowers and lenders in connection with these facilities.
Issues relating to the collateral and the perfection of the security interest therein is another key consideration for NAV Facilities. A detailed legal analysis of the collateral is often required in order to ensure proper perfection. For example, if such investment is an equity interest in an underlying investment, the perfection thereof can be impacted by whether such interest is certificated and possession of the certificate is required, if such interest is a “general intangible” perfected by the filing of a financing statement under the Uniform Commercial Code, or if the applicable entity has “opted into” Article 8 of the Uniform Commercial Code making such equity interest a “security” instead of a “general intangible”. Certain lenders may also require a deeper dive into the underlying investments and require actions to be taken with respect thereto, including securities account control agreements, liens with respect thereto and an understanding of any applicable custody arrangements. There may also be transfer restrictions, consent requirements, change of control provisions or other relevant terms, which can impact the pledge of such collateral. In addition, there may be implications as a result of asset-level indebtedness, such as mandatory prepayments or cross-defaults thereunder which could have implications on the collateral relevant to the lender’s analysis of the facility. The structuring and negotiation of the facility will also take into account tax and ERISA considerations, and the negotiation of covenants and events of default, including cash control restrictions, and limitations on the ability of the fund to make distributions and dispose of assets under certain circumstances.
Conclusion
NAV financing is a valuable tool to address an increased demand for liquidity for a late-stage fund and for all funds in a challenging fundraising environment. With the flexibility of NAV structures and their varied applications, NAV Facilities offer attractive returns to providers, while providing funds with needed liquidity and flexibility. We expect that NAV Facilities will continue to increase in popularity among both borrowers and lenders. In addition to the increase in demand, we have seen an increase in both bank lenders and alternative lenders in this market, and we expect to see the number of facilities and market participants continue to grow and expand.
If you have any questions about NAV Facilities, please contact Jeff Berman at (212) 574-1232 or Steven Starr at (212) 574-1405.
