Partner content by Alex Branton, Managing Partner at Nodem Capital.
Within Private Equity, the use of Net Asset Value (NAV) financing facilities has grown 50% year-on-year, with Pemberton research suggesting the NAV financing market will approach $700B by 2030.
Whilst the topic is frequently covered in the news - think Howard Marks’ Oaktree acquiring NAV lender 17Capital – the asset class is still widely misunderstood.
While popularity is exploding amongst GPs, we’ve seen a sharp increase in family offices using these facilities to unlock strategic cash quickly without selling investments.
The rise of illiquid assets
Family offices are increasing their exposure to illiquid assets, such as real estate, private equity, private credit, venture capital, and hedge funds.
Given the scope of asset classes and geographies, raising capital quickly for strategic purposes through bank loans is often not possible (due to onerous bank risk weightings), and selling illiquid portfolio positions often attracts steep discounts in the secondary markets.
To raise strategic capital for investments and operations, family offices seek bespoke credit facilities from lenders who understand their needs and complex collateral bases.
This is where non-bank players such as Nodem Capital are adding NAV tools to family offices' arsenals.
A NAV facility is generally a term loan in which a lender provides financing (debt or preferred equity) to a borrower, with the loan amount based on the borrower’s portfolio Net Asset Value.
Lenders may seek to obtain a security interest directly over investment assets (e.g., a pledge of interests in a subsidiary vehicle established to hold the investments) or a security interest supported by those assets (e.g., a pledge of deposit accounts into which proceeds are deposited).
Every deal can be customised to account for each family office’s circumstances.
A major attraction of many NAV facilities is that their interest rates are better aligned with the illiquid nature of the underlying assets. Many facilities do not require annual cash interest payments, with lender returns generated through accruing Payment-in-Kind (PIK) interest.
NAV facilities allow family offices to raise strategic capital quickly by leveraging a highly illiquid asset base.
Many are unlocking liquidity against older, slowing assets to make accretive investments, fund follow-on investments, pay taxes or other costs in succession, fund capital calls, and to refinance existing debt.
Whatever the reason, here are three considerations for family offices that decide to pursue NAV financing:
Structure: Family office-managed funds do not always hold interests in a way that is instantly conducive to typical NAV securities. NAV providers work with family offices to ensure substantive lender protections without imposing overly cumbersome processes on borrowers.
Calculation of NAV: Lenders often seek to include a right to independently calculate NAV or challenge a family office’s internal NAV calculations in the credit facility documentation. Valuation assessments can diverge markedly.
Transfer Restrictions: NAV facilities to family offices have traditionally posed some challenges to lenders due to the potential for direct or indirect transfer or pledge restrictions in the operating documentation of the underlying investments. To counteract this, lenders may seek a pledge of accounts into which such assets are custodied, rather than a direct pledge of equity.
In summary, NAV financing offers significant value for family offices as tool to leverage their illiquid asset base and unlock cash quickly, without the need to sell investments.
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Alex Branton is the Managing Partner at Nodem Capital, a leading investment firm that delivers tailored Net Asset Value (NAV) financing solutions to GPs, LPs, and Family Offices. The firm underwrites and provides facilities against complex baskets of illiquid global assets.
Led by Branton, a Cambridge Associates alumni, Nodem Capital is authorised by the UK Financial Conduct Authority and backed by leading institutional investors, including the Lepercq Group. The size of their solutions ranges from $5m to over $100m.
