Net asset value (“NAV”) facilities are credit arrangements underwritten by the value of a fund’s investment portfolio, in contrast to subscription credit facilities (“SCFs”), which are underwritten based upon undrawn commitments of a fund’s investors. Although historically utilized in secondaries, private credit, and infrastructure, NAV facilities have gained traction in private equity (“PE”), with the market projected to expand from $100 billion of principal amount of facilities to $600 billion by 2030. The Institutional Limited Partners Association (“ILPA”) recognized the growing NAV facility market in its recent release on guidance for NAV facilities for PE funds (the “ILPA Guidance”), noting that “NAV-based facilities can be a useful tool for capital structuring or to provide financing to support assets” while cautioning that their use “presents concerns for limited partners.”
Given that the NAV facility market is still maturing, particularly with respect to buyout funds, it is an appropriate time to identify potential issues in the market and advocate for solutions to such issues so that all market participants have a common set of expectations. The recent ILPA Guidance does both, but some of the proposed approaches to address potential limited partners’ (“LPs”) concerns may not adequately reflect the traditional discretion of general partners (“GPs”) to manage funds and the unique nature of the NAV facilities market.
NAV facilities enable GPs to provide interim liquidity, manage indebtedness, and support portfolio companies without liquidating assets, offering a potentially more cost-effective alternative to debt at the level of the investment or portfolio company. GPs have to balance these benefits against the potential concerns that can be presented by NAV facilities, including transparency with respect to the use of such facilities by funds.
Limited Partner Concerns Regarding NAV Facilities
ILPA’s Guidance identifies several key LP concerns related to the use of NAV facilities by funds:
- Transparency