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NAV lending grows rapidly as heightened disclosure looms

May 2024

New York/London, May 13, 2024 - Growth in Net Asset Value (NAV) credit facilities has continued at a brisk pace as more private equity and alternative investment funds turn to alternate lenders for loans to acquire immediate investment opportunities, according to the Citco group of companies (Citco), the leading asset-servicer with $2 trillion in assets under administration (AUA).

The 30% compound annual growth in NAV facilities utilized by Citco clients between 2019 and 2023 was largely driven by managers borrowing to create liquidity in order to fund opportunistic investments. The vast majority of the time, Citco is seeing NAV facilities used in the following manner:

  • Follow-on investments initiated by alternative funds to support their existing portfolio;
  • Limited Partners (investors) borrowing to generate liquidity as an alternative to secondary sales;
  • Alternative funds using the facilities to support overall fund and deal expenses.

Across Citco’s ecosystem, less than 15% of NAV facilities have been used to fund distributions to investors, with the remaining 85% used for the purposes above.

A NAV facility is most often a loan – extended by banks, insurance companies and specialty private lenders – to an alternative investment fund that is secured by the fund’s investments, which collectively comprise its NAV. These investments may consist of private equity, venture capital, infrastructure, credit, real estate or holdings in other investment funds. Citco attributes the spike in growth to a general slowdown in acquisitions and initial public offerings that has forced many alternatives funds to hold onto investments longer than predicted. Therefore, they have sought out NAV facilities to provide liquidity and time to continue to invest in and support their portfolio companies’ growth.

Separately, some investors use these facilities to generate liquidity as an alternative to a sale of their limited partnership interests on the secondary market. NAV facilities are viewed as a cost-effective way to generate liquidity without crystalizing exits at values below par.

This growth comes at a time when the Institutional Limited Partners Association (ILPA), which represents private equity LPs, is due to release draft recommendations in the near future with the aim of introducing heightened disclosure about when NAV facilities are used and potential underlying risks.

However, Citco believes the majority of facilities are not used to fund investor distributions. Rather, NAV facilities address the fact that closed-end fund structures – which are widely used by alternative managers due to their time-tested benefits – are not set up to raise additional equity after the final fundraising closing. Borrowing using these facilities allows managers to invest optimally in order to maintain or grow the value of their assets.

Citco plans to expand its NAV lending capability to match demand, drawing from its own liquidity and a range of institutional partners. This commitment is based on the fact that the majority of facilities provided by Citco are used to fund investment opportunities, which carry lower risk and are additive to the future profitability of the fund.

Michael Peterson, Managing Director of Citco Capital Solutions Inc., said: “These facilities continue to serve a purpose within the alternatives sector – evidenced by their continued growth – and represent an invaluable safety valve for alternatives vehicles. Closed-end funds, or their investors, obtain liquidity at a reasonable cost that allows them to fulfil their fiduciary duties. Lenders receive an appropriate risk-adjusted return, at a prudent loan-to-value with diversified collateral.”

The NAV facilities provided by Citco are typically low leverage – in a range of 3% to 20% of eligible collateral within a fund. As the lender pool has changed, with some banks no longer in business and others hoarding capital, Citco seeks to help fill the breach. Overall, the presence of NAV facilities provide a source of liquidity for closed-end funds, allowing them to maintain resilience in a precarious environment.

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