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NAV facilities gain popularity with PE funds

Growth in Net Asset Value credit facilities has increased exponentially in importance among private equity and other alternative investment funds since the pandemic relative to the secondary trading of assets as a means of creating liquidity, according to the Citco group of companies.

Growth in Net Asset Value (NAV) credit facilities has increased exponentially in importance among private equity and other alternative investment funds since the pandemic relative to the secondary trading of assets as a means of creating liquidity, according to the Citco group of companies (Citco).

The NAV credit facility, a little-known institutional financial product, experienced approximately 30% annual growth across Citco’s client base between 2019 and 2022, while secondary trading grew at an annual rate of approximately 7% over the same period. 

According to Citco, the NAV Facility is now growing in importance as it has the benefit of generating interim liquidity, allowing the assets to be realised in an orderly manner over time. In turn, asset sales have become challenging as central banks worldwide tighten financial conditions, with data from Pitchbook revealing that the exit – or sale of assets – to investment ratio for private equity firms, hit a 10-year low in 2022.

A NAV facility is most often a loan – extended by banks, insurance companies and specialty private lenders – to an alternative investment fund that is secured by the fund’s investments – private equity, venture capital, infrastructure, credit, real estate or holdings in other investment funds.

Citco says that typically, funds borrow to generate liquidity and deploy additional capital after the commitments from their investors are exhausted. An alternative use of a NAV loan is when institutional investors seek incremental leverage on their Limited Partnership (LP) holdings in alternative funds. Historically, institutional investors have tended to use this type of loan in order to generate liquidity when the cash flow from their LP portfolio is expected to slow.

The current size of NAV facilities globally is estimated to be less than $100 billion, according to data from The Fund Finance Association, which represents under 1% of the estimated value of private capital investments. Based on current growth rates, Citco estimates the NAV market could grow to over $600 billion by 2030.

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