In times like these, when companies don’t have access to low interest rates and cheap debt, firms are getting more creative with injecting capital into their businesses. Here’s something new.
Mergers & Acquisitions has spent time investigating liquidity solutions and creative ways that private equity firms are using to inject capital into the firm. Whether it be continuation vehicles or secondary funds, the current macroeconomic environment has forced firms to adapt or be left with less capital.
Matt Wiener, a managing director at Aon, says there is another liquidity solution that is gaining steam for private equity managers that doesn’t necessarily involve M&A: Net Asset Value Loans. Instead, Wiener describes the mechanism as a unique recapitalization or private credit strategy. NAV Loans consist of a bank or alternative lender providing a fund or subsidiary with a revolving credit facility based upon the net asset value of the fund’s investment portfolio.
“There’s actually a lot of private equity sponsors that are creating unique, novel ways to finance or do recaps,” says Wiener. “One of those that we can see coming up quite often are what are called NAV loans or net asset value loans. And these are interesting credit instruments where a GP may have a variety of reasons why they want to create liquidity but one of them may be similar to a secondary where they want to be able to provide liquidity to their LPs. Rather than doing a secondary where they’re effectuating a sale of interest, what they’re doing is they’re taking out a loan where the creditor for the lender is being secured by the underlying value of the GP portfolio.”
For instance, Hunter Point Capital, an independent investment firm providing capital services to alternative asset managers, launched the firm’s GP Financing Solutions platform in March. The firm intends on providing NAV-based loans to assist investment managers in their long-term and strategic goals.
When the time comes for those portfolio assets to be sold, the lenders are paid first. Essentially, the lenders take a first lien position and as a result, the general partners receive liquidity to distribute to limited partners, grow the business, or inject a cash infusion.
What’s your view of liquidity solutions such as NAV loans? Let me know at [email protected].
–Cole Lipsky
