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Fund finance has developed into an important source of liquidity
for private equity funds.
Historically, fund finance has been limited to credit, secondary
and infrastructure funds, but now we are seeing private equity tap
into this market, which continues to see significant activity year
over year. Fund managers have been seeking additional liquidity
since the wake of the pandemic, and amid an uncertain market new
lenders are rushing in to fill the void. As a consequence, demand
is outpacing supply, creating fertile ground for innovation in deal
Traditional fund finance typically consists of subscription line
financing, in which a fund would pledge to a lender the right to
call capital from limited partners. The lender’s recourse is
limited to the partners’ obligation to make capital
contributions in accordance with the terms of the fund documents,
and the loans are short-term, requiring periodic paydowns. These
revolving loan facilities allow the fund to make fewer capital
calls, which smooths IRR and saves all parties involved from the
administrative burden of multiple calls.
NAV financing has allowed fund managers to leverage
portfolio assets in a way that goes significantly beyond
In contrast, net asset value, or NAV, finance is typically used
for later-stage funds or funds that are acquiring existing
portfolios. Under this structure, the fund pledges its portfolio
holdings to the lender, the net value of which—after
discounting based on the creditworthiness of the underlying
portfolio and certain other factors—calculates the borrowing
base against which the fund can borrow.
The rise of NAV financing
We have seen a real uptick in the use of NAV facilities,
especially in the Canadian markets. NAV financing has allowed fund
managers to leverage portfolio assets in a way that goes
significantly beyond subscription financing. Using traditionally
illiquid fund investments, fund managers can accelerate
distributions to limited partners, finance add-on investments
without calling capital and bridge new investments for additional
In a turbulent market marked by persistent uncertainty,
lenders and borrowers alike are looking to fund finance to
facilitate portfolio growth and return to their
NAV facilities are diligence-intensive, requiring not only a
review of the fund and its partners, but also a deep dive into the
portfolio. Step in rights and consents are dealt with by
structuring the borrowing entity above the portfolio investments.
Mandatory prepayments are triggered by changes in loan-to-value
ratio and covenants govern asset eligibility. Meanwhile, as
large-cap private equity has entered the market, we have seen
sponsor-friendly and leveraged loan type provisions become more
common in mid-cap deals.
In a turbulent market marked by persistent uncertainty, lenders
and borrowers alike are looking to fund finance to facilitate
portfolio growth and return to their investors. We expect to see
continued growth in NAV facilities and hybrid facilities (which
combine subscription facilities and NAV facilities into one
agreement) in both the United States and Canadian markets in the
second half of 2022 and into 2023, as the need to maximize
liquidity remains a priority for fund managers.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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