In a changing economic landscape, private equity fund sponsors are increasingly conscious of the need to shore up liquidity, whether to take advantage of the opportunities that the market presents, as a defensive measure to protect value in existing portfolios, or as a component of a longer-term strategy.
Over the past few years, innovations in fund finance have given sponsors an increasing number of options to address liquidity requirements.
In particular, we now see increasing demand for liquidity by way of NAV financing (NAV) and preferred equity (Pref), with a strong market of providers such as traditional bank lenders, new bank entrants to the market, and non-bank lenders (including private credit funds).
Nav Financing and Preferred Equity Tools
Expand the sections below to learn more about some of the reasons we see private equity fund managers implementing these products in the current market.
Strategic Acquisitions
With the opportunities presented by market dislocation, some market participants turn to NAV/Pref as value-add tools to finance opportunistic acquisitions or add-ons, particularly later in a fund’s lifecycle when investor commitments have largely been drawn.
Leveraged Returns
In certain asset classes (including where leverage is limited due to regulation or otherwise at the asset level), NAV/Pref may be used to implement a leveraged strategy, enhancing the rate of return a fund is able to deliver to its investors.
Incremental Recycling
Although NAV/Pref have historically been seen by some as “end-of-life” liquidity solutions for funds, some managers use these solutions during the investment periods of funds to bridge distributions and generate recallable capital for further deployment.
Extending Time Horizons
Market conditions may lead private funds to hold investments for longer terms, both to protect and enhance value. NAV/Pref provide a means for funds to do so while still unlocking liquidity to be distributed to investors by way of a “dividend recap” at the fund level. Financing providers are repaid in due course from future sales of the underlying assets.
Protective Restructuring
NAV/Pref can serve as financing sources to de-risk existing investments, providing a bridge to asset-level restructuring or funding for covenant cures or deleveraging under asset-level financing, ultimately with the aim of achieving enhanced exit multiples.
"Aftercare” Working Capital
As unfunded investor commitments reduce over the life of closed-end funds, fund managers may turn to NAV/Pref as sources of working capital for the continued management of their portfolio.
Continuation Vehicles
An increasing number of private funds seek ways to extend their management of assets through the use of continuation vehicles (funded by existing and/or new investors). NAV/Pref often play important roles (including in combination) in the structuring and financing of such continuation vehicles, both by way of acquisition funding and/or a source of financing for distributions to outgoing investors.
Sponsor Expansion
An increasing number of fund managers use NAV/Pref at the sponsor level (TopCos, Management Company and/or GPs) to facilitate additional capital for new or existing strategies, incremental sponsor investment in underlying funds, accelerated realization for sponsors of future economic entitlements and for tax planning purposes. Such solutions can also be deployed as valuable “succession planning” tools and for other strategic transactions.
Key Considerations
NAV financing and preferred equity structures are often highly bespoke and require tailoring to the structure and liquidity needs of a specific sponsor. Goodwin’s private equity team guides market participants through potential solutions based on important considerations geared toward finding the most suitable solution.
- Availability
- LTV Covenants/Borrowing Base
- Repayment & Cash Sweeps
- Recycling
- Continuation vs. Exit
- Pricing
- Secured vs. Unsecured
- Structuring & Stakeholders
- Reporting & Valuations
- Tax & Regulatory
contacts
Goodwin’s global fund finance, preferred equity and secondaries private equity lawyers have acted for and advised managers, partners, funds, bank and non-bank liquidity providers and other market participants on a wide range of products across the fund finance sector. We have broad experience acting on asset based, NAV and Pref solutions to market participants in the PE buyout, direct lending, and secondaries, amongst others.
Please reach out to any of us, or your usual Goodwin contact, to discuss the contents of this insight or how NAV/Pref may support your private equity fund structures and investment strategies.
- /en/people/e/emerson-robert
Robert C. Emerson
Partner - /en/people/c/chopra-ravi
Ravi Chopra
Partner - /en/people/s/steinroeder-chris
Chris Steinroeder
Partner
