Why is the market focused on large NAV loans?

Net Asset Value (NAV) financing has rapidly emerged as a sophisticated and valuable tool within the private markets, offering a flexible means of unlocking liquidity from portfolios of private assets.

While NAV loans can be structured for a wide range of portfolio sizes, there is a discernible trend in the market that suggests larger NAV loans, backed by more substantial and diversified portfolios, tend to offer more advantageous terms for borrowers. This is not merely a matter of lender preference but is rooted in fundamental principles of risk management, economies of scale, and market dynamics.

One of the primary drivers behind the superior efficiency of larger NAV loans is the principle of economies of scale. The legal and administrative costs associated with structuring and executing a NAV financing facility can be substantial. These costs, which include legal counsel, due diligence, and valuation services, are often fixed or semi-fixed, meaning they do not scale linearly with the size of the loan. For a smaller loan, these transaction costs can represent a significant percentage of the total facility, making the cost of capital prohibitively expensive. In contrast, for a larger loan, these costs are spread across a much larger principal amount, diminishing their relative impact and resulting in a more cost-effective financing solution for the borrower.

Furthermore, the diversification of the underlying asset portfolio plays a crucial role in the risk assessment conducted by lenders. A larger portfolio, by its very nature, is more likely to be diversified across multiple dimensions, including industry sector, geography, and vintage year. This diversification mitigates the impact of a poor performance by any single asset on the overall value of the portfolio. From a lender’s perspective, a well-diversified portfolio represents a more stable and predictable source of collateral, reducing the overall risk profile of the loan. This lower perceived risk can translate directly into more favourable terms for the borrower, including a lower cost of capital, higher loan-to-value (LTV) ratios, and more flexible covenants.

Finally, the appetite of the lender market is a significant factor. Larger, well-diversified portfolios are attractive to a broader and deeper pool of institutional lenders, including large banks, specialist credit funds, and insurance companies. This increased competition among lenders for high-quality financing opportunities can drive down pricing and lead to more borrower-friendly terms. In contrast, smaller NAV loans may only appeal to a niche segment of the market, limiting the borrower’s options and potentially resulting in less competitive terms.

In conclusion, while NAV financing is a versatile tool available to a wide range of private market participants, the benefits of scale are undeniable. The combination of lower relative transaction costs, reduced risk through diversification, and greater lender competition makes larger NAV loans a more efficient and attractive proposition for borrowers seeking to optimise their capital structure and unlock the latent value within their private asset portfolios.