Editor's Note: This post is the third in a four-part series titled "Unleashing the Power of Data: A Comprehensive Guide to Building Your Private Markets Data Strategy" that explores the importance of having a data strategy framework for private markets and why it is a topic of growing interest, published by Lionpoint’s Front & Middle Office team.

Previous posts outlined the importance of formulating a target operating model, choosing a system, and assessing data frameworks. In this post, we will dive into the elements of executing a data strategy program, highlight the benefits of implementing a data strategy, identify common complexities of an implementation, and detail best-practice implementation elements and methodologies.

Introduction to NAV Loans 

A NAV loan is a type of credit facility that is collateralized by the net asset value (NAV) of a private equity fund’s portfolio. They have emerged as a notable and dynamic instrument for investment funds seeking liquidity and growth. With over a 50% increase in the number of NAV loans year on year and a 40% increase in the average deal size, the market for NAV loans is expected to grow to $600 Bn by 2030 according to CITCO 

NAV loans serve a variety of purposes, such as providing liquidity to investors by returning funds early and thereby often enabling them to reinvest in subsequent funds. This is particularly of interest to investors facing their own liquidity challenges due to the slowing rate of exits with PitchBook reporting exits have slowed to their lowest rate since the financial crisis. NAV loans may be seen as preferable as they are often a much faster method of freeing up cash than the alternative secondary transaction and the LP does not have to take a discount on the investment.  

NAV loans may also be retained by the GP to fund further acquisitions or other growth initiatives to improve the fund profitability or just manage a portfolio companies indebtedness. Some GPs explore NAV loans as a way of paying down the fund sub-line instead of calling capital from investors.  

Benefits of NAV Loans 

Some of the benefits of NAV loans are:  

  • Access to liquidity: Private equity funds can obtain access to liquidity through NAV loans. The liquidity can be utilized for various purposes such as funding acquisitions, repaying debt, or providing distributions to investors. This enables the GP to retain an asset for a longer period without the need to exit at an unfavourable time. 
  • Flexibility: NAV loans are typically more flexible than traditional loans, which means that they can be used for a wider variety of purposes. For example, NAV loans can be used to fund portfolio companies that are not yet generating cash flow. 
  • Collateralization: NAV loans are typically collateralized by the net asset value (NAV) of the fund’s portfolio, which means that the lender is protected if the NAV declines. This can make NAV loans a more attractive option for lenders than other types of loans, which may not be collateralized. 
  • Ease: it is oftentimes easier to borrow against a suite of assets than against a single portfolio company  
  • Tax benefits: In some cases, NAV loans can provide tax benefits for private equity funds. For example, the interest payments on NAV loans may be deductible for tax purposes. 

NAV Loan Risks  

Although NAV loans can be advantageous in certain situations, it’s important to consider the potential risks as well. One such risk is the difficulty in accurately valuing the underlying portfolio companies, which are often illiquid investments and subject to volatile valuations. This presents a challenge for lenders when evaluating a loan and for borrowers once the loan is in effect. 

NAV Loans are also collateralized against the value of the fund’s portfolio, if investments perform poorly or market conditions result in NAVs declining the lender may call the loan sooner than originally anticipated, creating the very liquidity problem the NAV loan sought to ease originally and in extreme cases could result in the borrower defaulting on the NAV loan. The NAV loans are structured to lower this risk, often with covenants tied to the Loan to Value (LTV) and the number of remaining investments in the borrowers’ fund.  

The interest rates on any NAV loan may also outweigh the benefit or improved liquidity in the long run, interest rates can be as high as 20 – 30% and many are floating meaning the cost of NAV loans will have increased as the base rates have been increasing recently. This could mean the borrower paying a much higher interest on the NAV loan than anticipated if taken out just a few years ago.  

Lastly an unknown risk is that of regulatory changes, as NAV loans become more prevalent they are likely to attract more regulator attention. If rules around NAV loans change; such as increased capital requirements of lending limits, this will affect both borrowers and lenders.  

Leveraging technology to manage NAV Loans  

Considering the risks involved, it is crucial to have the ability to forecast and monitor a fund’s valuation and cashflow with accuracy. This feature is usually available in advanced performance and risk modelling platforms like Anaplan. Anaplan serves as an answer to both challenges, and Lionpoint has efficiently implemented these models with various international clients in the Private Equity sector. Some key features of Anaplan are:   

  • Modelling: Anaplan can be used to create complex models that accurately reflect the forecast cashflow and underlying NAV of a fund’s portfolio. This can be helpful for private equity funds that want to ensure that their NAV loans are properly collateralized. Anaplan can also be used to simulate different scenarios to assess the impact of changes in the NAV. This can be a valuable tool for private equity funds that want to understand the risks associated with NAV loans. 
  • Collaboration: Anaplan is a cloud-based platform, so users can access their models and data from anywhere. This makes it easy to collaborate on NAV loan modelling projects. Anaplan also has built-in collaboration and workflows features that can be used to share models and data with other users. 
  • Scalability: Anaplan can be scaled to meet the needs of even the largest private equity funds. This means that users can easily add new data and variables to their models as their portfolios grow. 
  • Reduction of risk: Anaplan’s scenario modelling capabilities can be used to quantify the risk associated with NAV loans and assess the impact of changing market conditions. This information can be used to make more informed decisions about whether or not to take out a NAV loan. 

In Summary 

NAV loans offer great potential for firms to increase liquidity or increase investment ability and better serve their investors as well as being an attractive option for credit lenders. As exits slow they are becoming a more widespread tool used by private equity funds. Lionpoint’s deep industry and Anaplan knowledge can combine to create solutions which help both sides better model, track and asses their NAV loan facilities. Get in contact if you want to know more at info@lionpointgroup.com  

In this article
Aaron Whitworth
Associate Director, EPM - Europe

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