Enhanced communication and engagement key to the growth of NAV finance
July 5, 2024 (Preqin News) – European private credit manager Pemberton Asset Management announced a $1bn first close for its NAV Strategic Financing strategy, complementing its NAV Core Financing Fund which held a first close in June 2023.
Pemberton launched both funds with targets of $1.5bn at the start of 2023, but started the NAV Strategic Financing fundraising in earnest after the first close of the Core Financing Fund.
Thomas Doyle, Partner and Head of NAV Financing at Pemberton, told Preqin News: ‘The core product has investment grade risk with non-investment grade returns. There are low attachment points, low LTVs, and diversified portfolios. With strategic you are getting quasi equity returns, but with contractual returns and a lot of downside protection.’
The Abu Dhabi Investment Authority (ADIA) came into the Strategic Financing Fund as an anchor investor. ‘NAV financing is one of the fastest growing asset classes in private credit and we are confident Pemberton’s new strategy will prove attractive to a broad range of GPs,’ said Hamad Shahwan Aldhaheri, Executive Director of the Private Equities Department at ADIA.
The Core strategy will provide NAV loans to private equity funds and has a lower risk, lower return profile than Strategic, which provides non-dilutive strategic capital solutions to private equity GPs and funds. Doyle said the Core strategy was particularly appealing to insurance companies as it is rated as investment grade, despite its constituents being below investment grade, because there is significant loss insulation, diversification, mature assets, and robust structural protections.
Doyle said that while private debt funds providing NAV loans are a relatively new development, the product has been provided by banks for decades. ‘There’s a lot of discussion about NAV finance,’ said Doyle. ‘We think NAV finance is a brilliant tool with amazing use cases. We always advocate that the GP engages with their LPs and communicates about why they're raising capital this way. One of the main barriers to growth of this market is a lack of understanding and the way to overcome that is communication and engagement.’
'Concerns about NAV loans are specifically about one use case, the dividend recap transaction where it’s for capital that the investor doesn’t particularly need or want and is being used to synthetically boost the IRR or DPI of the fund,’ said Doyle. ‘There appears to be less concern when the money is used to support the portfolio, for expansion, or to defend a weaker company. And that is overwhelmingly the use case. 82% of inquiries are for capital to go down to the portfolio and, for the record, we’ve done no deals for dividend recaps,’
Pemberton has expanded rapidly since launching its first fund, Pemberton Mid-Market Debt Fund I, in 2015, which raised €1.2bn. The fourth fund of that series is currently in market with a €4bn target. It has raised three Strategic Credit Funds and two Senior Loan Funds, the second of which held a first close in December 2022 and has a target of €3bn, as well as a Risk Sharing Fund and the two NAV funds.
Pemberton was founded in 2011 and received a strategic investment in 2014 from Legal & General, which took a 40% equity stake in the fund manager. The insurance group said on a strategy presentation in June that it would seek to grow private markets AUM from £48bn in 2023 to £85bn, and would ‘materially scale our in-house and origination platform capability in private markets, significantly expanding our capabilities and client offerings across real estate, private credit and infrastructure, including through an accelerated program of fund launches.’
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.