Overcoming NAVpprehension

Overcoming NAVpprehension

02.07.2024

By Edward Beecham, partner, Alpha Match

Conflicting points of view are causing GPs to feel unsure and hesitant about how to move forward with NAV facilities

Recent conversations with GPs reflect a widespread sense of hesitation around NAV facilities. Against a backdrop of conflicting opinions of these loans, it's no surprise managers are feeling uncertain.

Towards the end of last year, the Institutional Limited Partners Association (ILPA) warned members about managers using NAV facilities without informing their investors. This perceived lack of transparency, along with rising concerns over the loans being used for distributions, prompted the LP trade body to put together specific NAV guidance, which is expected to be published imminently.

More recently, ILPA's Neal Prunier - senior director for industry affairs - has further explained the trade body's concerns. According to him, most LPs are not supportive of the facilities due to poor communication. He has noted that a lack of transparency and unclear reasons as to why they are being used is problematic.

This kind of market chatter can make it challenging to know how best to explore the suitability, use cases and most appropriate lenders of NAV facilities.

Furthermore, while some corners of the market are scrutinising these loans, other parts - namely lenders - are talking up the benefits and advantages of NAV facilities.

On balance, NAV facilities are an important tool in a GP's tool kit, providing access to efficient and flexible liquidity. In the main, these facilities provide a path to generating further value in the underlying assets and ultimately drive returns.

Analysis paralysis

The natural starting point for any manager considering a NAV facility is speaking to their relationship bank. From our experience, this conversation can go one of two ways.

Either the bank is able to provide a facility, in which case heads of terms need to be gathered and benchmarked against other lenders.

Or, the relationship bank is unable to provide the loan. Typically, this will be because the portfolio is too concentrated, the facility is potentially too small or they simply don't provide the product.

Whether or not one's relationship bank can provide a NAV facility, Alpha Match works with GPs at this point in the process to identify further suitable lenders and validate terms.

Going it alone during these early stages can be daunting. If the relationship bank is unable to help, that initial set back can engender a sense of uncertainty as to whether or not any lender will be able to provide a facility for your specific requirements. This is leading to doubts such as, even if a lender can be identified, surely the cost will be astronomical?

The vine of ambivalence continues to creep; what about the transaction itself? How will it be structured? How long will it take? Won't this cause a huge distraction to both myself and the team? How do I communicate this with LPs and how will they respond?

Combining a GP's natural concerns about taking on a relatively new form of financing with conflicting noise in the market, as well as a scarcity of publicly available information on active lenders and typical terms and costs, it's no surprise we're picking up on a common sense of inertia.

On the move

In response to this uncertainty, and as a general rule in any situation where the path forward is unclear, the most sensible action is to gather as much information as possible.

Whenever one is operating from a place of ambiguity, especially without the requisite information and data, it's all too easy to find reasons not to move forward. Especially if doubts are being fuelled by anecdotal evidence; war stories from peers about their own experiences with obtaining (or more accurately of not being able to obtain) NAV facilities.

But if we put this scenario into the context of making an investment, behaviour would naturally change.

Regardless of the hype or negativity around a particular sector or asset, as a returns- driven investor, proper research and due diligence would be carried out to understand what's actually happening. The numbers always tell a far more accurate picture than hearsay.

This is where we can help turn misconceptions and misunderstandings into facts and reality. Alpha Match is the only digital debt intermediary active in this market.

When considering a NAV facility, it's clear that a fair amount of the work needs to be done upfront in order to provide LPs with the information needed to move ahead.

By doing that groundwork, by gathering information on active lenders as well as benchmarking heads of terms, GPs are equipping themselves with the necessary tools to move ahead confidently on a NAV facility, with high levels of awareness of the options available. More importantly, given the recent noise in the market, seeking LPAC approval when armed with this kind of fact-based evidence allows for a far more tangible and practical discussion.

And Alpha Match is designed specifically to support this. Our tech-based solution means we can provide you with all the information required to sensibly discuss a NAV facility with the LPAC, and ultimately empower you to make the best decision.

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