Portfolio NAV Loans to Help a Portfolio Company

As a General Partner (GP) in a private equity fund, your primary objective is to drive value creation within your portfolio companies.

This often requires not only strategic guidance and operational expertise but also access to timely and flexible capital. While portfolio companies can and do raise their own debt, there are situations where a more efficient and strategic solution is to provide capital from the fund level. This is where a Net Asset Value (NAV) loan can be a powerful instrument in a GP’s toolkit.

A NAV loan allows a fund to borrow against the value of its entire portfolio of investments. The proceeds from this loan can then be downstreamed to a specific portfolio company to support its growth and development. This can be a more attractive option than the portfolio company raising its own debt for several reasons.

Firstly, the cost of capital may be lower. A NAV loan is secured by a diversified portfolio of assets, which represents a lower risk profile for a lender than a loan to a single company. This lower risk can translate into a lower interest rate and more favourable terms for the fund, a benefit that can then be passed on to the portfolio company.

Secondly, a NAV loan can be less restrictive. A loan at the fund level is typically governed by covenants that are tied to the performance of the overall portfolio, not the individual portfolio company. This can provide the portfolio company with greater operational and financial flexibility than it would have with its own, more restrictive, debt package.

There are numerous scenarios where a GP might use a NAV loan to support a portfolio company. It could be to fund a strategic, bolt-on acquisition that will accelerate the company’s growth. It could be to provide the capital for a major capital expenditure project, such as building a new factory or investing in new technology. Or, in a more defensive move, it could be to shore up the company’s balance sheet during a period of market stress or to cure a covenant breach on its existing debt.

By using a NAV loan in this way, a GP can act as a strategic financial partner to its portfolio companies, providing them with the capital they need to thrive. It is a flexible and efficient way to finance value creation, allowing the GP to leverage the strength of the entire portfolio to support the growth of its individual components. This ability to provide timely and tailored capital solutions is a key differentiator for a successful private equity firm and a powerful driver of returns for its investors.