Partner content by Alex Branton, Managing Partner at Nodem Capital.
Most of what gets written about NAV loans is about leverage. Private equity funds borrowing late in a fund's life, and the arguments for and against.
That is not what we have seen from family offices this year.
A NAV loan is a facility secured against the net asset value of a portfolio of private assets rather than against any single asset. In our family office pipeline the recurring use is not long term gearing. It is a bridge over a liquidity gap of 6 to 18 months: money is coming, it has not arrived, and something has to be paid before it does.
Why do family offices have liquidity gaps?
A family office balance sheet is lumpy. Fund interests, direct holdings, property. The cash from those assets arrives when it arrives. The demands on it are less patient. A tax bill has a date. So does a capital call, and so does a vendor with other buyers waiting.
An existing bank line is usually the first and cheapest option. It stops working when the liquid portfolio is already pledged, or when the bank cannot underwrite a cross border basket of fund interests and unlisted shares inside the deal timetable. The family is then choosing between a quick sale and a missed deal.
What does a quick sale actually cost?
It depends on what you are selling. A good quality, transferable buyout fund interest might clear at a 5% to 15% discount to NAV and take three to six months. A small, concentrated or hard-to-transfer position, or older venture, can lose 20% to 60% and still take months. A direct holding sold in a hurry is worse, because the buyer knows why you are selling. And nobody books the acquisition they could not fund.
The comparison is arithmetic, not ideology. Say a family needs $20m for twelve months. A NAV loan with interest rolled up is far more cost-effective than generating $20m by selling fund interests.
1. Consolidating lines at the holdco
A European family had four facilities, each secured on a different underlying business, each with its own lender. Two were up for renewal within nine months, and one bank wanted its exposure down.
Rather than renegotiate four times, the family took one NAV facility at the holding company, secured on the holdco's shares in the underlying entities rather than their assets, and repaid all four, releasing each bank's security as it went. Interest accrued. Repayment came from a business sale already under way and expected within 15 months. The facility was documented for 24, to give headroom if completion slipped.
2. Fronting capital for a deal ahead of proceeds
A US family agreed to buy a controlling stake in a business it had followed for two years. The seller wanted to close in 90 days. The money existed: a distribution from a 2016 vintage fund in wind-down and the sale of a property under offer were both expected within the year, just not within 90 days.
The facility: $25m against $140m of eligible fund NAV, an 18% initial loan to value, 18 month maturity, closed in about seven weeks against a sub pool of positions where pledge consents were straightforward. Either repayment source alone would have cleared it. Both arrived and the loan was repaid inside eleven months. Nothing was sold early.
3. Bridging a tax or succession event
A tax bill or estate event falls due, the liquid portfolio is already committed, and the private portfolio is where the value sits. The facility covers the bill and the family has 18 months to run an orderly sale of whatever it was going to sell anyway. With a starting loan to value of 15%, the portfolio could absorb a sizeable write down before any trigger was reached.
Sizing. The facility is sized to an identified repayment source, not to the maximum a lender will offer. Initial drawings are typically 10% to 25% of the lender's eligible value, which is reported NAV after exclusions and haircuts. Security sits at the holdco or SPV level, usually over shares and distribution accounts rather than the assets themselves.
Term. The liquidity event is usually expected within 6 to 18 months. The facility is documented for 12 to 24 months (with optional extensions) so there is headroom if completion slips.
And the bridge fails if the repayment source is hoped for rather than identified. Before borrowing, test what happens if the exit is a year late and eligible NAV falls 30% while interest keeps rolling up. Extension rights and any margin step-up are agreed at the outset, not assumed.
Most NAV lenders are built for private equity funds and start at $50m or more. Nodem Capital lends from $10m, well below where the market starts, up to $100m and more, so a facility can grow with the family rather than being outgrown.
At the smaller end we keep the structure standard so legal costs do not eat the facility. We have worked with families in the US, Europe, the Middle East and Asia. Our NAV loan parameters and the specifics of NAV loans for family offices are published on our site.
A NAV bridge makes sense when the need has a fixed date, the repayment source is identifiable, there is headroom if that source is late, and the all in cost is below the value lost through a rushed sale or a missed deal.
A first conversation with us covers four things: amount, date, eligible portfolio, and base case and downside repayment dates. If your facts pass those tests, ask for an indicative structure. If not, your bank line is probably the right answer.
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Alex Branton is the Managing Partner at Nodem Capital, an FCA-authorised asset manager providing facilities of $10m to $100m+ to family offices, GPs and LPs in the US, Europe, the Middle East and Asia. The firm underwrites facilities against complex baskets of illiquid global assets. Led by Branton, a Cambridge Associates alumnus, Nodem Capital is backed by leading institutional investors, including the Lepercq Group.
Disclaimer: The examples above are illustrative composites drawn from situations we have seen, simplified for length. They are not descriptions of specific transactions and do not constitute financial or legal advice. Pricing and terms vary by portfolio and should not be relied upon for investment decisions.
