Praxio

Introduction

There has been a significant increase in the number of NAV (Net Asset Value) facilities to private equity and other funds over several years and a large portion of that growth has come from non-bank lenders and credit funds providing these facilities. Non-bank lenders can provide agility and a certain amount of flexibility when structuring and executing NAV facilities. There are often less layers of internal approvals needed for credit and risk purposes and increased flexibility when it comes to the security package and other forms of recourse.

As demand for NAV facilities and the allocation by investors to private credit grows, it is likely that non-bank lenders will play an even greater role in providing liquidity to funds who require some sort of NAV based facility. These non-bank lenders may be well established direct lending funds who are now allocating a portion of their investments to NAV based lending.

We have also seen insurance companies set up designated teams within their businesses to focus on this type of lending. Finally, there are now several credit funds who have as their sole purpose allocating capital to fund financing facilities, usually in the form of NAV or GP/Coinvest facilities.

This article provides an insight into some of the nuances and structuring solutions we have implemented when working with our non-bank lender clients on NAV facilities.

Authors: Leon Stephenson

Are there characteristics of NAV facilities provided by credit funds which are different from NAV facilities provided by banks?

Drawdowns

Most credit fund lenders will either need to draw down from investors or utilize a subscription line facility prior to advancing funds to a private equity fund borrower. If a subline is not in place, the credit fund lender will need to manage its obligations to the underlying borrower to fund a utilization by ensuring that there is a sufficient utilization period to allow it to drawdown from its investors. This means that sometimes a longer drawdown period is provided for in the NAV facility. (e.g. 10 or 12 Business Day period) If the credit fund lender itself has a subscription line facility it can use, this drawdown period may be reduced to say 3 to 4 days of receiving a utilization from the NAV borrower.

Different pockets of capital

When a bank provides a facility, it is typically one single entity that will be the lender (unless it isa syndicated facility with different banks). When a credit fund or non-bank lender is funding, it may end up drawing from different pockets of capital managed by the same manager. Therefore, it is not surprising to see a number of different lenders, albeit managed by the same fund manager, be a lender of record when the facility closes. A syndicated form of facility is very often used that has as the facility agent, an entity controlled by the manager, or it may have a third party agent appointed.

Are all LMA and LSTA provisions required in the Facility?

There are several LMA or LSTA provisions in facility agreements that are really only there to protect regulated bank entities. Therefore, provisions such as Basle III, increased costs and Bank Levy provisions are not as relevant to a non-bank lender. Caution should be exercised when using a bank NAV form of facility agreement to document a NAV facility to be entered into by a non-bank lender, as alterations will need to be made.