Firm News

17Capital welcomes the release of guidance by the Institutional Limited Partners Association (ILPA) on the use of Net Asset Value (NAV)-based facilities within the private equity industry. The guidance emphasizes the need for transparency and alignment of interests between Limited Partners (LPs) and General Partners (GPs).

As a pioneer of the NAV finance market, we have seen first hand the tremendous growth that has taken place over the last 16 years since we raised the first dedicated NAV finance fund in 2008. We support the issuance of this guidance and view it as a natural step in the development of our market.

The adoption of NAV finance has increased particularly quickly in recent years, primarily driven by two factors:

• The growth in AUM of the private equity industry, which has more than doubled in the last 5 years and quadrupled in the last 10 years according to Preqin, as of December, 2023
• The increased awareness of NAV finance from high performing, institutionalized GPs

Today, private equity buyout firms have roughly $3.2 trillion of unrealized value spanning over 28,000 unique companies according to the Bain & Company Private Equity Outlook 2024. It is a vast and diverse population, where a ‘one size fits all’ approach relying solely on traditional corporate finance products is unrealistic and unhelpful for LPs, GPs, and the underlying portfolio investments.

The increased use of NAV loans, and a lack of familiarity with the product among LPs and GPs, has led to debate about their suitability. As one of the largest providers of these solutions, our view is that NAV loans are a financial tool that, when used responsibly, based on the relevant facts and circumstances applicable in that case, can help LPs and GPs successfully create value and increase liquidity. The judicious use of NAV loans can benefit all stakeholders, which we hope this new guidance from ILPA will encourage.

ILPA’s NAV-based facilities guidance

The guidance focuses broadly on three key areas:
1. Transparency
2. Legal considerations
3. LP due diligence, or key areas of focus that LPs should consider when evaluating the impact of NAV loans

Taking each of these in turn.

Transparency

The guidance stresses the importance of GPs being transparent with their LPs about the use of NAV loans. This includes detailed disclosures about the terms, the use of proceeds, and the potential impact the loan may have on the fund’s performance metrics and risk profile. They further recommend that GPs provide ongoing reporting, including the outstanding loan amount, interest expense, and the impact on fund-level performance metrics.

The guidance also recognizes the two primary use cases for NAV loans as:
1. Increasing investment capacity, i.e. funding add-on investments
2. Accelerating distributions to LPs, they suggest that facilities that accelerate distributions should require more formal LPAC approval

17Capital

ILPA is right to focus on transparency, it is without doubt one of the most important points. The guidance offers a more standardized approach to NAV loans, which is designed to reduce ambiguities and inconsistencies in how NAV loans are communicated and reported to LPs.

Whilst adoption rates have rapidly increased, many GPs have not yet executed a NAV loan, so it’s understandably not yet a part of the standard dialogue between GPs and LPs. This has resulted in uneven knowledge and exposure to NAV loans across the LP population. Like the growth seen in subscription finance and GP-led secondaries, LPs need time to assess these solutions and make considered judgments about their relative merits based on direct experience.

In our experience, in practice, GPs have appropriately engaged their LPs when considering the use of NAV loans, and LPs are generally supportive when the GP is able to articulate the value creation plan and rationale for the financing. This is certainly best practice and something that we have witnessed and proactively encourage. After all, these facilities are intended to be accretive for all stakeholders involved. Maintaining or even enhancing the alignment of interest between LPs and GPs has always been a key consideration for us when assessing an investment opportunity.

In terms of the two primary use cases for NAV loans, ILPA cites a Fund Finance Association finding that approximately 80% of NAV facilities support further investment in the portfolio, while 20% create distributions. This is largely in line with our experience and the investments held in our most recent credit fund.

Our view remains that, when used responsibly, NAV loans can be an effective tool for generating liquidity while allowing GPs to hold on to their best performing assets longer to create more value for their funds. We fully support further engagement among LPs and GPs on the appropriate circumstances for using NAV loans as a liquidity tool.”

Legal considerations

ILPA recommends that newer LPAs should directly address the use of NAV loans, including reporting expectations and LPAC roles. The guidance states that older LPAs generally do not directly contemplate NAV loans, which has led to varying approaches for implementing and reporting NAV loans among GPs. Some GPs interpret borrowing provisions as allowing NAV loans without LPAC consent, whilst others seek broad consent.

17Capital

We agree that existing LPAs are largely silent on the use of NAV loans. In practice, our experience is that GPs almost always proactively engage with their LPAC members to solicit support before using a NAV loan, even if the LPA does not require them to do so. The inclusion of provisions in LPAs directly addressing NAV loans will likely accelerate the use of NAV finance and further establish it as an important tool within the private equity toolkit.”

LP due diligence

ILPA has provided a standardized questionnaire for LPs to use to assess NAV loans. The questionnaire covers aspects such as facility size, intended use, structure, terms, and LTV ratios. Additionally, they advise that LPs should consider the GP’s track record and current circumstances to evaluate potential risks associated with NAV loans.

17Capital

We agree that transparency and clear communication between LPs and GPs is of the utmost importance, and support LPs’ commitment to conducting a comprehensive due diligence process. The questionnaire is helpful in that it standardizes the information that is expected to be shared with LPs. However, it is important for LPs to understand that NAV loans are typically highly bespoke. Each fund and situation is unique, which must be taken into account when comparing the terms of one facility to another.

When LPs are well-informed about the strategies and risks associated with NAV loans, we would expect that they will feel confident in their use and in the GPs managing their funds.”

A positive step

ILPA’s guidance represents a positive step for NAV finance. By promoting transparency and providing reporting expectations, this guidance should enhance trust and maturity within the market. As NAV finance continues to grow, such structured guidance will play an important role in ensuring its sustainable and appropriate use, ultimately benefiting all stakeholders. The adoption of NAV lending is likely to accelerate as the guidance provides a framework for LPs and GPs, further establishing NAV finance as an important tool within the private equity toolkit.