NAV financing in the spotlight

After the 2021 private equity boom and the underperformance of many (mostly technology) companies, many PE funds are now struggling to realise returns and raise follow-on capital from their LPs.

Some private equity firms are turning to NAV financing to supplement their traditional LPs’ funding.

NAV financing, also known as portfolio financing, is capital lent to a vehicle or fund comprised of a diversified underlying portfolio of companies. The lender receives priority over all other LPs in the fund and is repaid from the portfolio’s underlying cash flows / distributions.

Similarly, some lenders are offering NAV credit facilities, also leveraged against the cash flows / distributions of the underlying portfolio companies.

NAV financing can alleviate dependency on LPs and provide GPs with an alternative to traditional liquidity events within their existing portfolios, allowing them to continue existing strategies for longer, pursue new strategies, or optimise fund performance.

According to 17Capital, a London and New York-based NAV lender, 90% of the financing provided typically gets distributed into portfolio companies. It is often used to maintain an investor’s position in a portfolio company or several portfolio companies, supplement distributions, fund add-on acquisitions, or fill fundraising gaps.

For private equity investors, obtaining NAV financing may be a more efficient way to obtain capital for portfolio companies than finding individual debt financing for each company.

We anticipate the reliance on NAV financing will continue until markets rebound and LPs regain confidence in private equity returns.