NAV facilities are ‘not so much leverage on leverage’ – Alpha Match

February 19, 2025 (Preqin News) – GPs are increasingly using net-asset-value (NAV) financing as an alternative source of capital for follow-on investments and, in some cases, distributions. Specialist lender 17Capital estimated the size of the NAV market at $44bn in 2023, forecasting a rise to $145bn in 2030.

However, regulators and LPs have been critical of this form of fund financing. Rebecca Jackson, Executive Director for Authorisations, Regulatory Technology & International Supervision (ARTIS), at the Bank of England, called NAV facilities ‘leverage on leverage’ in April 2024, and investor body ILPA published guidelines for GPs reporting NAV usage in August last year.

However, the risks of covenant breaches are low, and NAV facilities are ‘not so much leverage on leverage’, according to research by Alpha Match.

The UK-based fund financing platform’s new white paper, the Lender Book Report, analyzed loan-to-value (LTV) trends by facility size and asset concentration to see how NAV facilities affect total fund leverage levels, and project their performance in stress and devaluation periods.

‘Each lender and individual financing circumstance will have its own considerations and sensitivities, meaning lenders structure a financing accordingly to mitigate these idiosyncratic risks. It is crucial to note that no single financing situation is the same, in terms of the lender’s credit underwriting analysis and the borrower’s purposes for the financing,’ said Ben James, Head of Lender Engagement at Alpha Match.

NAV facilities of less than £50mn ($62.9mn) have an initial LTV of 12.3% and a headroom of 7.1% – giving a total covenant LTV of 19.4%. Data from Alpha Match shows that facilities under £50mn can withstand a 36.8% fall in NAV before breaching the LTV covenant.

The ability of funds to cope with stress and devaluation varies by size. Funds with a NAV facility of £50–150mn can withstand a reduction of 42.7% before breaching covenants, while facilities between £150mn and £250mn breach at 31.7%, the worst for all fund sizes. The largest NAV facilities, over £250mn, have the greatest stress tolerance. Valuations would need to decrease by 47.5% for the facility to be breached.

The number of assets a fund holds also impacts headroom. Funds with less than five assets have an initial LTV of 20% and headroom of 5.0%. More concentrated portfolios are less diversified, so lenders seek to maintain a higher degree of control and be able to de-risk if underperformance occurs, the lender book report said.

Funds that hold more than ten assets are viewed as safer by lenders. Alpha Match says these funds have initial LTVs of 11% and headroom of 14.0%. However, the overall size of covenants remains stable at 25.0% and is not dependent on the portfolio size.

Banks typically look to provide finance to less risky funds, meaning that they can offer lower initial LTVs and higher covenant headroom, according to Alpha Match. On average, the initial LTV of bank-financed loans is 14.0% and headroom is 13.0%. However, private credit managers and other non-banking institutions are less constrained by capital holding regulations, and can offer higher initial LTVs (17.0%) with less headroom (9.0%).

The LTV data shows how selective a lender must be when lending to a fund – considering size, strategy, and the number of assets, according to Alpha Match.

‘Furthermore, when we take a closer look at the NAV facilities’ impact on a fund’s total level of leverage, we can clearly see these loans represent a minimal fraction of the overall debt pile – a pile that has been steadily reducing in the years leading up to the facility being put in place,’ the lender book report said.

Pemberton launched two $1.5bn NAV finance vehicles in 2023, announcing the $1bn first close of its strategic financing vehicle in July last year. HSBC Asset Management also announced its first NAV Financing Partnership fund last year, receiving an anchor commitment from its parent bank.

_{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.}