The Institutional Limited Partners Association (ILPA) has released new guidance for limited partners (LPs) and general partners (GPs) on net asset value–based facilities (NAV Facilities). NAV-based lending, a type of financing in which loans are backed by the underlying portfolio investments of a fund, has seen a surge in usage in private equity strategies as funds seek additional liquidity, including in challenging economic environments.
This growing trend is only expected to continue: the Fund Finance Association estimates that the market for NAV Facilities is currently $100 billion and is expected to grow to $600 billion by 2030.[1] Common uses for proceeds from a NAV Facility include to create an early distribution to LPs, fund follow-on investments, and/or support the fund’s underlying portfolio of investments.
The growth in the number of NAV Facilities has brought increased concerns from some LPs regarding its usage, mainly in relation to the transparency and varied practices of GPs in managing these facilities:
The ILPA guidelines seek to address these concerns by focusing its recommendations around two key themes, disclosure and LPAC engagement:
The full ILPA guidance can be downloaded on ILPA’s website. When taking into account the ILPA guidance, it is important to note that ILPA’s guidance has specifically focused its recommendations with respect to practices and disclosures in relation to the utilization of NAV Facilities for private equity strategies where the facility is structured as asset-based debt at the fund level, and as such does not cover its usage in other contexts such as closed-end real estate funds, secondaries, and private credit.
Many proponents of the use of NAV Facilities view that the concern from LPs on the use of NAV Facilities to fund distributions is somewhat unfounded when, according to estimates by the Fund Finance Association, only 20% of NAV Facilities are used for this purpose, while the remaining 80% are used to support further investment in the fund’s overall portfolio.[2] Some GPs have also expressed some concern about the recommendations for LPAC consent and enhanced disclosures, fearing that this may lead to an unwieldy and impractical process for putting such a financing in place, leading to potential delays and lost opportunities.
According to the ILPA guidance, while some GPs have already utilized NAV Facilities and have had effective communications with LPs on the matter, not all GPs have considered this process yet, which is where the ILPA guidance comes in, as it seeks to establish a standardized framework to encourage further cooperation between GPs and LPs and ensure their interests are balanced with the objectives of the fund.
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