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Fund financing activity soars as private equity managers access facilities in ever-increasing numbers
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The market is expected to grow sevenfold by 2030, to around US$700 billion.
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Fund financing products are rapidly evolving from simple bridging facilities to increasingly sophisticated tools used for NAV and GP financing
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New entrants expand the market and broaden the offering to more PE sponsors
Fund financing is positioned for record levels of growth as private equity (PE) general partners (GPs) tap traditional subscription and net asset value (NAV) financing lines in greater numbers.
This market, which began with simple bridge-type underwriting lines, is rapidly evolving into an increasingly sophisticated product, offering GPs a range of fund-level financing options.
As fund financing offerings have evolved, more and more GPs have used the product and valued the liquidity it provides to portfolio companies and investors at key stages of the fund’s life cycle. . This has stimulated demand and encouraged new providers to enter the market alongside incumbent banks and alternative debt providers, making fund financing available to more GPs.
Fund financing is also gaining traction on a broader set of private market funds, with providers becoming adept at structuring collateral packages around the different profiles of various alternative asset strategies. Fund financing is now a regular feature in private credit, secondary market private equity, real estate and buyout funds, with venture capital managers beginning to explore how the proceeds could be used in their funds.
7x
17 Capital forecasts show NAV funding is on track to grow from US$100 billion today to a US$700 billion market by 2030
NAV Financing Drives Market Growth
A key driver of growth in fund financing in recent years has been the development of NAV facilities, which allow GPs to borrow against the NAV of assets held in their funds.
By borrowing from portfolio companies at the fund level, managers were able to make distributions to their Limited Partners (LPs) sooner without having to take out Crown Jewels, and provide additional funding to portfolio companies after expiration. fund investment periods.
Managers and lenders have also found ways to use NAV’s facilities to enhance returns by raising assets, whether as part of initial acquisition financing or post-deal.
NAV facilities have been applied with increasing frequency in GP-led fund restructurings. In these GP-led transactions, managers extend holding periods by transferring assets from a current fund to a new vehicle, giving LPs the option to roll over their holdings or withdraw them. Secondary investors (managers who trade stakes in private equity funds) financing these transfers use NAV lines of credit to finance a portion of their equity investments and increase returns.
With the investment bank Jefferies seeing 94% growth in GP-led deals in 2021, there is significant underlying deal flow available to active NAV lenders in this space.
The growth in NAV funding has been such that investors are now demanding exposure to the strategy. For example, 17Capital, one of the first providers of NAV funding in the market, closed an inaugural NAV fund in April 2022 with a hard cap of €2.6 billion, well ahead of the €1.5 billion euros targeted by the company during the launch. 17Capital forecasts show that NAV finance alone is on track to become a $700 billion market by 2030, up from $100 billion today.
The bright outlook for NAV loans was further underlined by the fact that asset manager Oaktree acquired a majority stake in 17Capital earlier this year in a high-profile deal in the market.
As fund sizes and the market grow, NAV lenders will be able to fund larger portfolios and tailor loan-to-value (LTV) ratios to portfolio specifics.
The typical LTV ratio for NAV facilities issued for portfolios is between 20% and 30%, but higher LTVs are not unheard of. When dealing with retro-leveraged arrangements with credit support from the relevant fund, the LTVs can be significantly higher.
Continuous innovation
The adoption of NAV finance lines, however, has not limited the pursuit of new and innovative developments among providers. Hybrid facilities, single fund and asset agreements, and GP funding are some of the additions to the suite of fund funding options.
In hybrid facilities, the size of a fund package will be determined not only by the net asset value of a fund’s portfolio, but also by any uncalled commitments still available to the manager with the LPs.
Structuring these deals has proven difficult due to the different types of collateral involved, but lenders have navigated different credit review requirements to rely on hybrid facilities throughout the life of the loan. ‘a fund.
Lenders have also responded to the growth of special accounts and single-asset transactions in private markets by tailoring lending to these situations.
For NAVs and underwriting lines provided to funds with a single LP, lenders have become familiar with the concentration of LPs by improving the due diligence process. Lenders have also taken a granular approach to assessing the creditworthiness of portfolios in order to provide NAV facilities to unique assets within a portfolio, but not others.
These innovations are driving the expansion of the uses of fund financing and the types of assets it can cover, and bode well for the growth trajectory of the market.
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