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Finance Forum Panel Recap – ‘NAV’igating The Secondaries Market’ – Securitization & Structured Finance

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NAV lending and its progeny garnered great interest at
Cadwalader’s annual Finance Forum, bringing together industry
experts on the cutting age of structuring creative solutions for
the ongoing liquidity needs of private fund managers. Joining the
panel were Akhil Bansal, Managing Director and Head of Credit
Strategic Solutions at Carlyle; Robert Camacho, Senior Managing
Director at Blackstone; Phillip Titolo, Head of Direct Private
Investments at MassMutual; and Michael Vasseghi, Managing Director
and Head of Insurance Solutions at Morgan Stanley. Cadwalader Fund
Finance partner Angie Batterson served as moderator.

The so-called net asset value (“NAV”) credit
facilities took center stage as the theme of the panel, familiarly
known as financing that “looks down” from the fund level
to the net asset value of the underlying portfolio of investments
in determining borrower availability for credit purposes. NAV
facilities are particularly useful for mature funds in which
investors have already funded a majority of their capital
commitments (often utilizing a subscription facility that
“looks up”) and the fund has deployed this equity into a
portfolio of investments.

Insurance companies are no strange bedfellows to NAV lending,
having spent the last five years providing liquidity solutions to
investment managers and their private funds. Insurance
companies’ appetite for investment grade risk at above market
spreads, coupled with their experience in investing at the LP level
based on their knowledge and expertise in underwriting managers,
uniquely positions them with the requisite expertise to lend to
private fund managers with more customized solutions than a
traditional bank loan product. Insurance companies access these
fund financings in two main legal forms: a bilateral bank loan type
facility or through a true securitization format, both of which are
assigned ratings by one of more of the rating agencies. The rating
is based on the expertise and the track record of the manager and
the process applied when selecting and monitoring investments. The
application of this technology has also been applied to support the
financing of a pool of limited partnership (or other) interests in
investment funds.

These structures incentivize a broader set of investors
(including regulated institutions) to participate indirectly in the
investment strategy of the investment fund with enhanced returns.
Titolo pointed out that insurance companies understand how to
underwrite LP investments, as they are typically LPs themselves in
other private funds. Titolo added that these lending transactions
require a team experienced in both fund underwriting and private
debt structuring, not an easy task in today’s market. Looking
at more challenging economic markets ahead, the panelists noted
that their strategy would be to focus on the GPs that they know
best and with whom they have worked and underwritten already on NAV
financings. The panelists predicted that a broader range of
alternative investors would be amassing investment teams to enter
this space over the next few years and that these investments can
be tailored to a bilateral execution as well as a multi-lender
club. Should market values of the portfolios decrease, the unique
aspect of NAV financing is the embedded lender protections that
accelerate amortization if certain LTV ratios are not met.

Panelists see this trend of non-bank lenders entering the space
as an extension of traditional “private placement” debt,
broader bank disintermediation and alternative asset manager’s
need for fund finance solutions. In this environment, where
borrower leverage can be difficult to obtain and the capital
markets are challenging, sponsors are increasingly looking at
financing solutions at the fund level. Vasseghi noted Morgan
Stanley’s involvement in the fund finance market is both as an
on-balance sheet lender as well as a lead structuring agent. He
sees that each of these transactions tends to be bespoke, but are
becoming more mainstream, as he has seen over 40 insurance
companies participate in the fund finance space in some form over
the past several years, with more inquiring each quarter. The
panelists uniformly agreed that creative structures are
particularly attractive when the asset-backed lending markets are
suffering from margin compression. When regular way financing
playbooks become challenged, keep an eye out for the incoming
innovation leaders.

For more information on the key issues and considerations in
PBNs and Rated Feeders, review our recent presentation.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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