Lifting the lid on the NAV Financing market

Alexis, how has the NAV Financing market developed over recent years? How large is it and how fast is it growing?

Alexis Sztejnman: NAV Financing has grown quickly into a large market over the past few years and its size is currently estimated to be around $100 billion. It is used in various kinds of transaction. NAV Financing loans help to fund purchases of portfolios of LP interests in the secondary market; they are used by GPs to release liquidity; and they can provide financing directly to private equity funds. The major factors driving the growth of the NAV Financing market are larger fundraisings by GPs and the growing volume of transactions in the secondary market. Depending on which structure is chosen, the finance can be provided by banks, private debt funds or newer entrants to the NAV Financing market such as insurance companies or pension funds.

What advantages does NAV Financing offer for borrowers?

AS: NAV Financing serves a variety of purposes. It provides borrowers with non-recourse debt at a reasonable cost, enabling them to boost the internal rate of return that investors see. Moreover, it also provides GPs with additional dry powder, which gives them the opportunity to invest in a more diversified portfolio of assets. It also offers GPs a way to provide liquidity to their LPs through a dividend recapitalization, which can allow them to avoid selling assets in an unfavorable market environment.

What types of assets and deal structures use NAV Financing?

AS: Various types of assets can use this product and there are different deal structures available in the NAV Financing space. The structure we would typically seek to implement at J.P. Morgan would see the borrower structured as a special purpose vehicle that contains LP interests in a portfolio of private equity funds. This gives us, as the lender, a collateral pool consisting of a well-diversified portfolio of stakes in private companies. The typical loan-to-value on deals like this would be between 30% and 50% of the NAV.

Why is this an attractive market for J.P. Morgan?

AS: We have been an active participant in the NAV Financing market for almost a decade and have participated in some of the largest transactions. The quality and diversification of the collateral pool means that the product is robust even through different market cycles and compares favorably with investment grade bonds in the public credit markets.

As a result we have found the risk/reward and relative value proposition of NAV Financing an attractive opportunity for the bank.

What kinds of organization do you syndicate your NAV Financing loans to?

AS: NAV Financing was originally a market dominated by a small number of leading banks that have the internal expertise to understand this product and underwrite the risks. Over time, the risk/reward profile of this asset class has attracted new lenders and a few sophisticated asset owners have started to participate in lending syndicates alongside the banks.

Which range from pension funds and insurance companies to wealth managers and family offices.
 
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