Private Equity’s Woes Spur Rise in NAV Loans — And Managers Offering Them

“It’s gone from a conversation that you had to actively pursue with GPs to a conversation that they actively want to have,” says NorthLeaf Capital’s Matt Shafer.


Illustration by II

Fundraising challenges, higher interest rates, and the resulting illiquidity have created a rush of managers into the net asset value lending business — once a small corner of private credit.

While some allocators are concerned by the conflicts presented by NAV loans, they can also make money on this trend by investing in these newly-launched strategies.

“It’s gone from a conversation that you had to actively pursue with GPs to a conversation that they actively want to have,” said Matt Shafer, global head of direct private equity at NorthLeaf Capital Partners.

Northleaf Capital is one of alternatives managers that have ramped up their NAV lending offerings in recent years.

NAV, or net asset value, loans are revolving credit facilities extended to private equity firms and secured by an entire fund. This is different from what private equity firms have done in the past when they typically borrowed money against individual portfolio companies. NAV loans have benefits similar to subscription lines of credit, including improved internal rates of return and fewer capital calls. But NAV loans are revolvers with significantly longer terms.

The most common use of the loans is to fund smaller acquisitions, without having to ask investors for more capital. “The most common use case is continued investment at existing portfolio companies and that tends to be through add-on M&A,” said Greg Hardiman, managing director at 17Capital, one of the oldest NAV lenders. The firm raised its first fund in 2010 and has $11 billion in capital. Hardiman said 17Capital is focused on buyout funds and avoids venture lending.

The firm is about to face increased industry competition.

According to one source, competitors got a look at the economics of the business when 17Capital was shopping for outside investors in 2021 and 2022. (Oaktree Capital Management acquired a majority stake last year.)

“We’re seeing a lot more asset managers hiring folks who are building out teams to do NAV lending because the demand is there, and the supply is not up to speed,” said Pramit Sheth, senior managing director at Kroll Bond Rating Agency.

Some managers are using the loans to facilitate refinancings at the portfolio company level, given the uncertain interest rate environment. As a wave of maturities comes due, private equity managers are looking to use NAV loans to derisk their portfolios, he said.

Then there are distributions. Capital is no longer pouring into private equity funds, leaving investment managers in a bind. If investment managers don’t distribute capital, their investors have less money to put to work in the firm’s new funds. If they do make distributions, the PE firms have less money to do add-on acquisitions or invest in their portfolio companies.

“There’s a complexity to this,” said Andrea Auerbach, head of global private investments at Cambridge Associates. “At Cambridge, we know that distributions are running at half the long-term average.”

If managers continue returning money to investors at the same pace, they may not be able to hold onto their best companies. A NAV loan is an alternative to launching a continuation fund.

All of these use cases have led to significant growth in the industry. According to Hardiman, in 2022, 17Capital saw $35 billion in potential NAV lending deals — an increase of 50 percent over the prior year. “If you look over a longer period, we see that opportunity set growing 30 to 50 percent year-on-year,” he said.

Mike Mascia, chair of the finance practice at Cadwalader, Wickersham, and Taft, and Jeff Johnston, founder of Wells Fargo’s fund finance business, recently helped Everbank, which was spun out of TIAA in August, launch a NAV lending business.

Mascia and Johnston founded the Fund Finance Association and are working to take advantage of the market’s growth.

“When we think about the product fit, it’s not about trying to recreate Wells Fargo and be the 800-pound gorilla,” Johnston said.

Everbank is talking with clients now and expects to close and book transactions in the fourth quarter. “We are in market. We are very focused on deploying the bank’s balance sheet,” Johnston added. Part of the firm’s longer-term plan is to syndicate loans to investors.

NorthLeaf Capital, which started in riskier “higher return, highly concentrated deals,” is moving into safer areas of the market, focusing on low loan-to-value ratios. The concentrated deals had “high teens IRR and 1.5 times multiples,” Shafer said, but “they can be hard to find and require a lot of work.”

New entrants are also filling a void left by First Republic and Silicon Valley Bank.

On Tuesday, Bloomberg reported that Apollo Global Management is expanding its NAV lending business, and is anticipated to sign roughly $4 billion in these loans in the coming months. As with Northleaf, Apollo’s business will focus on low loan-to-value ratios, according to a second source familiar with the matter quoted by Bloomberg. Apollo will focus on loans that will be used to make investments in the portfolio rather than some of their other uses, including making distributions to investors.