Over the last several years, a need has arisen in the fund finance market, which caters to private equity, venture capital, family offices, and other investment funds (“Funds”) and their sponsors, for financing to support and leverage investment portfolios of highly concentrated asset pools or even single assets, in each case, with limited liquidity. These portfolios present challenges for financings, including issues with valuation, enforcement, and liquidation. To overcome these challenges, the market has looked to a combination of tools from the traditional net asset value (“NAV”) and the margin loan markets. This Legal Update addresses the advantages of deploying these tools in a concentrated or single-asset financing market.

Background

Typical NAV Facility Structure

In a typical NAV facility, a lender or group of lenders provides a credit facility secured by the underlying portfolio investments of the Fund and related cash flows. The investment portfolio usually consists of various equity interests in non-public companies. NAV facility borrowers can vary and may be the Fund itself, a Fund subsidiary, or a special purpose vehicle. The collateral security structure may include a pledge of the equity interests of the borrower and/or the borrower’s investments, as well as one or more deposit or securities accounts pledged in favor of and controlled by the lender, into which distributions from portfolio investments are routed.

Cash proceeds of investments deposited to the controlled accounts are available to prepay the NAV facility per the requirements of the specific facility, which may include a requirement to pay down the loan to maintain the required loan-to-value ratio and/or a cash sweep of some portion of the portfolio proceeds. So long as no default has occurred, controlled funds remaining after periodic facility prepayments are available for distribution to the Fund and its investors. Additional credit support may include guaranties from...