Overview
During this session, Partner Anh Lee moderated a panel that provided key insights on current fund financing trends, including the latest in net asset value (NAV) facilities.
Session panelists included:
- Tom Hoge, Managing Director, Silicon Valley Bank
- Alexandra Woodcock, Partner, Mourant
In Depth
Key takeaways included:
- The market for fund financing has increased significantly in recent years, driven in part due to access to liquidity being of specific concern for private equity borrowers in the current economy. The year 2022 saw a particularly sharp uptick in demand for these facilities, with a distinct growth in demand for NAV facilities. Factors influencing this increased demand include a difficult fundraising market and diminished remaining capital funds, with borrowers turning to these facilities for follow-on investments to existing platforms and structures. Many are calling this “the year of the add-on.”
- Borrowers can expect some key differences in the terms of a NAV facility as compared to traditional capital call facilities. The underwriting for lenders under a capital call facility is based on the availability and ability of the lender to call on uncalled capital commitments to fund loan obligations, whereas the underwriting for lenders under a NAV facility is primarily based on the value of the portfolio investment of the fund borrower. The panelists suggested that to qualify for a NAV loan, a “good” NAV facility borrower candidate must have at least five portfolio company assets with no concentrations above 25%.. Other key differences include (1) a longer underwriting process, with the average NAV facility taking eight to 10 weeks to complete the initial underwriting; (2) third-party valuations will be required in an overwhelming majority of cases; (3) a smaller-sized facility (typically 5% to 15% loan-to-value); (4) frequently, at least 50% utilization will be required at closing and (5) generally, higher pricing.
- Though, historically, fund financing has been primarily structured as bilateral deals, they are now being syndicated in greater numbers. Lenders are reassessing deals and their risk tolerance given current macroeconomic factors; simply put, a fund financing deal that would have previously been booked as a bilateral deal is now being syndicated. Pros of this trend include access to larger facilities for borrowers, wider access to banking products and lower rates (as compared to a bilateral deal). On the other hand, administrative fees, arranger fees and legal fees will all be higher. Another potential drawback of syndication is that having more lenders could create issues at maturity if a borrower wants to renew but a particular lender wants to exit. This is of special concern for fund financing, as the typical tenor of a capital call facility is only one to two years.
- Many lenders are offering fund financing facilities as relationship builders to the existing funds and clients they work with, and the rise in demand has led to lenders becoming increasingly creative and collaborative to meet the varied needs of their clients. Determining the right utilization for a client’s specific use is key in structuring these deals, and lenders are actively involved in helping their clients find the right size facility in this market. The rise in NAV facilities showcases lenders’ willingness to offer broader options to meet their clients’ needs.
