Executive Summary
Net Asset Value (“NAV”) credit facilities1 are a tool that borrowers may use to access financing based on the value of their underlying investment portfolio. The users of these facilities are generally private equity funds, family offices, and large investors with diversified private equity holdings. Because of the structures that accompany these types of entities and constraints related to the investment portfolio, there is no one-size-fits-all approach when it comes to NAV credit facilities. Therefore, market participants should understand both the spectrum of collateral and the covenants at their disposal to effectively structure each facility to meet the borrower’s needs. In this Legal Update, we explain the most common types of collateral structures used in secured NAV credit facilities and explore why some approaches are more frequently used than others based on the borrowers’ structures and asset classes. While most NAV facilities that are secured include account pledges with related covenants, additional collateral structures include: (i) pledges of investments, (ii) equity pledges, whether of each entity in a structure or of a holding vehicle or aggregator entity, (iii) pledges of distribution proceeds and (iv) pledges of cash or securities accounts. Each structure is suited to different circumstances, depending on factors such as portfolio composition, transfer restrictions, and lender risk appetite.
Background
NAV credit facilities come in a variety of shapes and sizes—with many differences driven by the asset class of the investments, the asset pool’s concentration or diversification, the advance rate, and any debt or transfer restrictions imposed upon the assets. NAV lenders must take into account the diversity of collateral and restrictive covenant structures, and collateral packages must require flexibility to account for the limitations often presented by the asset pool. The NAV credit facility market has grown substantially in recent years, driving innovation...