NAV Finance 101
The Next Generation of Private Credit For Venture & Growth
What is NAV finance?
Despite the rapid growth of NAV (Net Asset Value) facilities within PE, there have been no equivalent facilities for Venture and Growth. Nodem Capital is rectifying this.
NAV finance is a form of private capital financing available to private funds that is secured against the value of their investment portfolio. It supplies non-dilutive capital, most often structured as debt or senior equity, which allows borrowers to boost liquidity, create more value, and manage their portfolios with greater effectiveness. While this financing method has been around for more than a decade and a half within private equity, its use has accelerated recently, parallel to the industry's own rapid expansion. To put this growth in perspective, assets under management (AUM) within the private equity sector have nearly doubled since 2019 to about $10 trillion, a total that is over three times higher than it was in 2014.
Unlike revolving credit facilities, which are typically used during a fund’s investment period, NAV finance is usually provided either during a fund’s value creation phase or very late in the investment period when most of the limited partners’ capital has been called.
NAV lending usually features bespoke loans that are structured based on the specific needs of the lender and borrower. However, there are several features that are common across most PE-focused NAV loans:
They are usually senior-ranking instruments that are collateralised by a diverse portfolio of private investments.
They typically have long-dated maturities and floating-rate coupons.
The payments to the NAV lender are funded via cash flows from the underlying investments.
The loan-to-value ratios are typically low – only 5-30% compared to 35-60% for a typical middle-market direct lending deal.
Many of the assets in the underlying portfolio are expected to be monetised before the NAV loan matures.
What makes NAV finance attractive for lenders?
This rapidly growing area of private credit offers potential returns comparable to those seen in direct lending, but it typically also provides stronger downside protections. Moreover, returns in NAV finance have historically been correlated with the growth of the private equity industry, not the performance of individual assets, resulting in relatively low volatility.
Lenders also benefit from (a) the diversification of the underlying portfolios; (b) strong covenants; and (c) alignment of interest with sponsors, as NAV lenders will typically only face losses if a portfolio experiences a substantial decline in value. Additionally, while NAV loans are bespoke, they also tend to be fairly straightforward to execute, unlike many other forms of private credit, making them especially attractive for borrowers seeking speed in execution.
What makes NAV finance attractive for borrowers?
NAV loans provide portfolio managers with liquidity while enabling them to maintain the equity upside of their underlying investments. Moreover, these loans give fund managers greater flexibility that can be used both offensively (e.g., to fund add-on acquisitions or to refinance more expensive debt) and defensively (e.g., to reduce the risk that a manager will have to sell assets at reduced prices during a dislocation or to support a struggling portfolio company). Importantly, by enabling fund managers to generate liquidity and make add-on investments without sacrificing upside potential, NAV finance may be able to help increase long-term risk-adjusted returns for private equity funds and their investors.
How do NAV lenders manage risk?
At the fund level, NAV loans hold a senior position, which means lenders have priority for repayment before any capital is distributed to equity shareholders. However, it is important to recognise the loan's position relative to the fund's underlying assets; it is structurally subordinate to the lenders of the individual portfolio companies. In practice, these portfolio companies will service their own debt before cash can flow up to the fund level, where it can be used to pay back the NAV lender.
This risk is significantly mitigated because NAV loans are backed by a diversified investment portfolio and are typically issued at conservative loan-to-value (LTV) ratios below 30%. As a result, a lender would only experience a loss in the rare event of a substantial, broad-based decline in the value of the entire portfolio.
Adapting NAV Lending For Venture & Growth
Nodem Capital has taken the NAV lending playbook and adapted it for Venture and Growth:
They are usually senior-ranking instruments that are collateralised by a diverse portfolio of Venture/Growth investments.
They typically have a mix of maturities to fill specific needs with variable coupons.
The interest to the NAV lender accumulates in the form of a non-cash PIK.
The loan-to-value ratios are typically low – only 15-25%.
Many of the assets in the underlying portfolio are expected to be monetised before the NAV loan matures.
Highly flexible structuring to meet the needs of the borrower, from DPI acceleration to generating fast capital to save a company or buy discounted shares.
