NAV Finance Market Update – Finance and Banking

Between Omicron, vacations, and year-end closings on the wire, it’s been an eventful end to 2021. But now that the timeline points to 2022, we wanted to reflect this week on the state of NAV finance. market and give some ideas on the trends we are seeing at the dawn of 2022:

Transactional volume. 2021 was another year of significant growth in demand for NAV financing products. This growth is expected to continue until the start of the new year. While in the past years (even 2021) we have seen some slowdown in trading activity in January (likely as everyone was taking a break from the hustle and bustle of December), this year we are moving forward. full steam ahead with a full list of new deals.

New lenders. We have seen a noticeable increase in the number of new lenders (including banks and private lenders) entering the NAV market and potential new lenders showing curiosity about the range of potential product offerings. Of particular note are asset managers and insurance companies, which have led the charge on some major transactions. Our hope is that as more lenders enter the market, NAV loans will be seen as less esoteric and become more widely available to sponsors looking for leverage and profitability improvements. liquidity.

Various borrowers. In addition to private equity funds, secondary funds, hedge funds and funds of hedge funds, in 2021 we saw significant demand for funding from registered alternative investment firms, family offices and funds of hedge funds. pension.

• Alternative registered investment companies are public investment funds registered under the Investment Companies Act of 1940 that invest in a portfolio of private equity funds or engage in investment strategies of hedge fund or private equity type. They often rely on lines of credit as investment leverage, for cash management or to finance periodic share buybacks from their investors. We are currently working on several loans to such investment funds.
• The sophistication of family offices continues to increase, and family offices have been the borrowers of many of the largest NAVs, secondary funds and funds of hedge funds deals we worked on in 2021. Having closed several large family office transactions in the last days of 2021 and the first days of 2022, we plan to work more with family offices in the coming year.
• While we didn’t see a huge volume of transactions for pension funds close in 2021, the ones that did were significant. And we’ve spent a lot of time refreshing clients on issues like UBTI, Sovereign Immunity, Capacity, and Authority. Based on the number of inquiries, we expect an increase in the number of fundings for pension funds in the coming year.

Spreads. Spreads can be difficult to track in the NAV financial market given the breadth of products, the diversity of risk profiles and the range of lenders and borrowers. However, by looking only at comparative subsets of chords, the trend lines are clear. Spreads have narrowed from their pandemic peaks in Q4 2020 and Q1 2021. That said, spreads still have not reached their pre-pandemic levels. For 2022, it will be interesting to watch the tussle between (potentially) rising rates and increased competition as new lenders enter the NAV market. Market volatility (or lack thereof) will surely be another key factor to watch out for.

Some products.

• Continuation funding for PE funds. Despite the skyrocketing value of stocks, many sponsors still see the potential for substantial returns from their core investments. Sponsors deployed fund-level debt to fund dividend recapitalizations and facilitate the launch of continuation funds, which allowed them to delay fulfillment events and extend the life of those investments.
• Margin loans and pre-IPO loans. The market for pre-IPO and margin loans is on fire, lenders are gaining more and more comfort in financing portfolio positions thanks to the transition from private to public… and beyond. High valuations, a bustling IPO market, and low interest rates in 2021 have presented ideal conditions for a significant rise in these types of funding. We will wait and see if rising interest rates and increasing volatility in public equity markets dampen the enthusiasm we experienced over the past year for these products or if the market appetite for these products continues unabated.
• Preferred shares and preferred leverage. In addition to the usual players in the preferred stock space, we saw a strong participation of secondary funds in the preferred stock market in 2021. Preferred stocks were often accompanied by funding – either as part of the acquisition by the secondary fund, or as a recapitalization of the dividend by the issuer of the preferred share.
• Secondary funding. With major secondary fund sponsors continuing to raise record capital, mega-funds are expected to support robust trading levels in the secondary market. And we expect a significant portion of this trade to be financed by debt.
• Funding of hedge funds. 2021 has been a strong year for hedge fund financing. It’s no surprise that much of this activity is the result of new fund launches and large mandates for separately managed accounts assigned to the largest fund of hedge fund investment managers. But there has also been a recent upsurge in single-manager hedge fund operations (loans to feeder funds, general partners, management companies or principals guaranteed by interests in a single affiliated hedge fund). This market has been relatively calm in recent years.
• Portfolio cover. The LIBOR changes dominated lawyers’ timesheets in the fourth quarter, but we have had a lot of discussion with lenders and borrowers about strategies to most effectively integrate currency and interest rate hedging programs into financial markets. financing offers. Given the increasingly international orientation of investment portfolios and concerns about potential interest rate hikes, we plan to devote more time to portfolio hedging issues in 2022.
• Oversizing. While new deals get all the attention, increases in the size of existing deals have been quiet drivers of earnings growth for many net asset value-focused companies. Staying close to customers and giving them the flexibility to meet their evolving needs pays off. Hikes in the valuation of investment portfolios and investor expectations for accelerated returns on capital were important factors behind the size increases.

ESG. The negotiation of environmental, social and governance agreements has been an increasingly relevant topic in recent years and, as has been widely discussed in Fund Finance Friday, has become a growing component of the general underwriting fund financing market. However, on the NAV side of the market, we have yet to see ESG make significant inroads in structuring and documenting transactions. Net asset value facilities are generally provided to funds in the later stages of their investing activity or to funds that use net asset value funding to acquire or benefit from a specific investment or portfolio of investments. . This obviously makes it more difficult to provide financial incentives to a fund based on ESG investment measures in these contexts. Nonetheless, it will be interesting to see how ESG continues to impact fund finance markets in general and whether we will start to see ESG impact the NAV finance market in particular.

LIBOR / SOFR modifications. While LIBOR remediation has been in full swing for some time in the subscription finance world, the transition to LIBOR is only just beginning in the US NAV markets. Given the more targeted use of NAV financings in general, there is usually a smaller subset of currencies available to borrow for a particular facility. As a result, the LIBOR transition date of December 31, 2021 for LIBOR rates other than the US dollar had a much smaller impact on NAV financings (at least in the US) than in the underwriting space. We expect 2022 to be a different story.

Pandemic 4.0. Aside from a few canceled plans and a short-lived (hopefully) return to the WFH, the market has so far proven remarkably resilient in the face of Omicron and its sheer number of cases. Whether it’s because the prevailing wisdom is that this latest wave will ebb as quickly as it sank or that we’re all much more familiar with the pandemic playbook at this point, the chord flow is going full blast. The New World Order’s regime and macroeconomic concerns are once again focused on mundane things like a hawkish Fed and inflation.

We wish everyone a Happy New Year. We are very happy to have some time in front of Miami at the FFA Global Symposium next month and to work with you again this year, whatever 2022 may bring.

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