August 21, 2023
Private Equity: Sponsors Put More Skin in the Game Through NAV Loans
I recently blogged about PE sponsors putting more equity in their deals in response to the challenging deal financing environment. Now, this Institutional Investor article says that those sponsors are increasingly using “Net Asset Value” (NAV) loans to fund add-on acquisitions in situations where they don’t wish to ask investors to pony up more equity. What makes the rise in NAV loans interesting is that in an industry premised in large part on using other people’s money to the greatest extent possible, this type of financing puts the PE fund’s balance sheet on the line. This excerpt from the article explains:
NAV, or net asset value, loans are revolving credit facilities extended to private equity firms and secured by an entire fund. This is different from what private equity firms have done in the past when they typically borrowed money against individual portfolio companies. NAV loans have benefits similar to subscription lines of credit, including improved internal rates of return and fewer capital calls. But NAV loans are revolvers with significantly longer terms.
The article says that NAV loans are also being used to facilitate refinancings at the portfolio company level and, in some cases, to finance distributions to investors. The article also highlights the fact that growing demand for these loans has resulted in a number of new financing sources entering the market to provide them.
– John Jenkins