CJ Doherty:
Welcome to the Lending Lowdown. I’m CJ Doherty, director of market analysis at LSEG LPC. In today’s podcast, I'm happy to say we’re going to touch on a first-time topic for us.
We will talk about NAV loans made to private equity funds, including their role and how they create value for LPs. The NAV loan product is gaining increasing attention and so I’m sure you will find the conversation insightful.
Joining me to discuss this topic is Aryeh Landsberg, Managing Director of Investments at 17Capital, and Ryan Moreno, Partner and Co-Head of Private Credit and Fund Finance at DLA Piper. Thank you both for joining me.
Aryeh Landsberg & Ryan Moreno:
Thanks, CJ, Thanks, CJ.
CJ Doherty:
To kick it off, can you both introduce yourselves and give some background on your role and let’s start with you, Aryeh.
Aryeh Landsberg:
Thanks, CJ. I’m Aryeh Landsberg, Managing Director of Investments at 17Capital, based in New York City. 17Capital is a specialized private credit manager focused on private equity NAV financing. And my role is primarily sourcing execution, deal negotiations and monitoring. So, start to finish, the entire NAV financing investment process.
Ryan Moreno:
And my name is Ryan Moreno. I am the Co-Head of Private Credit and Fund Finance at DLA Piper based in New York, where I focus on representing, primarily, private credit funds, but also banks in a range of fund finance transactions although I focus on NAV, including primary NAV and secondary NAV.
CJ Doherty:
Before we delve into more specifics on the NAV loan product. Let’s start with the basics for those listeners who are not familiar with it. Can you give an overview of NAV loans made to private equity funds?
Aryeh, if you can give a business overview first that we can then hear from Ryan for a basic legal overview.
Aryeh Landsberg:
NAV finance is a broad category, but high-level NAV loans are financing transactions structured as loans to single private equity funds, or the underlying portfolio of private companies are used to support the loans. They’re also loans to secondaries funds or diversified pools of LP interest can be used as collateral. And this differs as well from subscription lines and hybrid facilities where the recourse tends to focus up the structure back to the LP commitments.
Today, I think we’ll focus primarily on single fund, private equity NAV loans, and some of the trends and use cases we see in the market. Ryan can touch on structure and documentation, but at a high level, these tend to be used for accretive financing opportunities within the portfolios.
Ryan Moreno:
Thanks, Aryeh. And in terms of, you know, how we’re structuring these transactions from a legal perspective, historically, the NAV loan would have been made at the fund level. But more and more, we’ve been seeing an evolution in the market where we are creating SPV structures to be the borrowers for these NAV financing transactions. And so, what we’re essentially doing is creating, typically a bankruptcy remote SPV, and the actual fund interests in fund assets are assigned and moved over to that entity and it is going to be the actual borrower under our NAV financing.
In terms of the documentation, there’s going to be a credit agreement; all the basic bells and whistles you would expect in a lending transaction. You’ll see things like cash flow sweeps and triggers related to that to protect the lender and downside scenarios and the collateral security can be highly dependent on the fund manager you’re working with, the, you know, size and type of the portfolio.
Historically, you would have expected to get an equity pledge of that borrower. More and more these days, we’re seeing what we call recourse light structures, where the lenders are getting pledges of bank accounts, getting payment direction letters, but not necessarily getting equity pledges due to the direct and indirect, transfer restrictions often found in the underlying asset documentation.
CJ Doherty:
Now, let’s talk about various use cases. Can you provide a deep dive on a couple of specific transactions, so as to give listeners an idea of how it’s used practically in the real world? You know, how GPs deploy it? How does it fit in their financial toolkit?
Aryeh Landsberg:
The vast majority of NAV loans are used for additional investments in the fund and to help support new acquisition financing.
This can be a creative add ons, strategic M&A, or making an entirely new platform acquisition for the fund. And to that point, we’ve executed several transactions over the past year focused on accretive portfolio M&A. A common theme that we find in the market is when a fund gets towards nearly full deployment. So, think of that as a baseline of greater than 80% of their capital called and deployed.
NAV can be a useful tool to help manage remaining capital needs, maintain a balance between remaining uncalled capital from their LPs for additional uses such as accretive M&A opportunities but also for fund level expenses. Reserve accounts for fees and expenses at the fund level. A common theme that we’ve noticed as funds are trying to manage full deployment has been an effort to address LP concerns about a longer deployment cycle and, essentially managing the difference between gross to net performance for what has been a longer holding period and a longer, capital investment cycle.
So, one transaction we’d highlight from mid 2025 or we helped a large US middle market fund looking to navigate their capital formation issues around multiple remaining portfolio investments towards the end of their investment period. And ultimately, we provided a large now facility to facilitate a new platform acquisition. The facility was structured to include a delay draw mechanic as well, to allow for additional borrowings down the line, which were ultimately used to fund an incremental portfolio add on to an existing portfolio company, as well as a second new platform investment via a take private of a publicly listed company.
And so, from the manager’s perspective, a very useful financing tool to help manage a number of conflicting interests, including reserve financing, LP liquidity concerns and getting to full deployment for their fund. Another one I’d quickly highlight all those that same theme would be transaction executed, very recently that focused on getting a manager who had recently raised a new fund fully deployed for their last fund.
And so, the concern there was how to optimize performance from a prior vintage while getting their newly raised capital and that fund turned on to make additional investments as their pipeline, continued through execution. And so, the NAV facility was used in that case to make the final acquisition for a portfolio company and to minimize, what had been a reduced capacity under the subscription line and dwindling amount of on call capital.
And so, the manager was quite keen to reach full deployment with their last fund and then pivot their attention and their investment team’s resources towards managing the newly raised capital.
Ryan Moreno:
The themes you’re seeing there, right, are older vintage funds that have been out there for a bit that either are past their investment period or just have, you know, little to no unfunded capital to call from their investors at that point, but that have a significant, you know, portfolio and significant value in there.
And so, we can essentially create liquidity from that value and give the fund additional proceeds for follow on and investments, additional M&A activity that, to Aryeh’s point, before, is typically highly accretive for the fund and its investors at the end of the day. Seeing a ton of that I don’t think we're going to actually see the macroeconomic conditions change in the short term in terms of what’s driving that in terms of the M&A markets being relatively, slow and valuations still being a bit out of whack. So, we’re going to we're going to see a bunch of those funds out there that, you know, really could use this tool and can help them kind of manage through situations. The interesting thing for me with the space, right, is 10 to 15 years ago, when subscription facilities kind of first became a real thing in the market, you kind of had the same reaction from the market community in terms of what is this and how can I use it?
And now it’s just become part of the GPs financial toolkit, just like, you know, anything else. And I really think the NAV loan product is just going to be part and parcel of all the other the avenues a fund manager can use to drive liquidity for their fund, and, and for their investors.
CJ Doherty:
And for the use cases you’ve mentioned. Can you provide insight on the extent to which the market taps banks versus direct lenders and why?
Aryeh Landsberg:
I think it’s a complex, dynamic between a GPs relationship with their lender banks and with their direct lenders, potentially and increasingly in the private market. So, having worked as a lender at various banks for nearly 20 years, I think an important theme to recognize is that banks will continue to support their largest clients via financing, as part of an overall relationship.
And so, the focus will be on the largest firms with the largest ancillary revenue opportunities. And so, if you think about it through the perspective of wallet share, the biggest banks will focus on the mega cap funds, which have been prolific users of syndicated bank loans, leveraged finance, private placement, in addition to being large M&A and advisory clients.
And so through that lens, banks will advance credit and use their balance sheets to support those clients, but they will generally tend to be the largest firms, the publicly traded names and for the largest funds, where private credit solutions are potentially a better fit will be for firms that are less backed by the mega cap banks, and where flexibility and customization are important from a structural perspective.
Banks tend to have a prescriptive structure that needs to fit within the risk parameters and a predefined box and have, as you might expect, a more bureaucratic underwriting and approval process. Whereas private lenders can be more dynamic and more responsive to idiosyncratic borrowing needs in terms of timing, in terms of collateral package, in terms of structuring and documentation that Ryan mentioned previously.
And these transactions are, as a feature, not designed to be reliant on a business case. And they can be standalone relationships with first time users who may not necessarily have the scale and drive the revenue opportunities that a bank might reserve for their biggest and best clients.
Ryan Moreno:
You know, I think context is helpful here in terms of where that I have loan product came from and where it is today.
Banks, historically, had been the provider of the NAV loan product, more in a kind of a in a fashion where they would do it as an accommodation for one of their larger sponsor clients, kind of hold their nose up in the air because they didn’t love the deal, but did it for the wider relationship. And thematically, we’re seeing a lot of the things that’s happened with, you know, the direct lending space, you know, within the past 5 or 10 years, they’re now popping into the NAV loan space where you have private credit shops like a 17Capital, you know, like a Heart Capital that can bring a bespoke solution to different situations for the fund managers that that they’re speaking with and apply some creativity. And yes, there’s probably some pricing that goes along with that, but you’re going to get speed and execution, and get your deal done really quickly and in a great way. So, what we've been seeing on the direct lending side for many years in terms of private credit funds kind of taking and eating up more and more of the market share that banks historically occupied there.
The same thing is happening in the NAV loan space to Aryeh’s point, I think this is going to continue as more and more middle market and fund managers start to understand this product and start to understand the different ways they can deploy it within their fund structures.
That’s why I kind of, from my perspective, I think this area is really right for just an explosion in the next couple of years.
CJ Doherty:
Okay. And given everything you've said, does use of NAV financing reflect a secular or cyclical trend? You know, to what extent, if any, is this product a result of a market environment defined by lower levels of liquidity and exit activity?
Aryeh Landsberg:
Yeah CJ, I don’t think so. I think that NAV financing has been around for a long time. And 17Capital’s been doing it perhaps the longest since, since 2008. And so, it’s existed through a number of different cycles, both macroeconomic cycles, both cyclical trends in terms of fund dynamics and fundraising environments. But maybe most importantly, in terms of a variety of interest rate environments.
And so, while I think the current liquidity dynamics regarding fundraising and regarding exit velocity and a general perception of a lack of liquidity, which has an ancillary, I think, we are now seeing signs of a bit of a thaw in terms of the exit backlog from some of the more successful managers, exiting, some of their companies that they've held perhaps a bit longer than they initially planned.
But I wouldn’t describe the liquidity environment that we’ve seen over the last few years as a present go forward state that we can expect to live in over the next cyclical, nature of the business environment. And as a backdrop and for context, now, facilities provide flexibility, optionality for managers towards the end of their investment period, regardless of what’s going on from a macro perspective.
And I think we’ve reached a critical threshold where NAV, as Ryan alluded to, is becoming a more permanent part of the capital structure. It becomes a natural extension of the dynamics around subscription financing, which 15, 20 years ago was a new and adopting product and now has become a mainstay because LPs really appreciate the benefits of the funding dynamics and not having to necessarily send wires and and honor capital calls multiple times in a given quarter.
And I think NAV financing addresses a similar use, particularly as other options become more complex, such as funding acquisitions through portfolio company level debt, which is often includes a risk of the current market dynamics, the funding dynamics around bank issuance, and bank warehousing capabilities. And so, funds have worked very hard over the last few years to reach a positive fundraising environment and raise their next vintages.
And it’s really incumbent on them to manage their last funds efficiently and well, get fully deployed and then find a way to maximize their exit values, particularly regarding leverage ratios, as that's become a more important criteria for potential buyers. And NAV is one of many ways they can effectively manage all of those concerns.
Ryan Moreno:
I’m going to give you a very lawyerly answer here CJ and say yes and no.
To your question, to Aryeh’s point before NAV financing has just become a permanent part of the GP toolkit, at this point. And there’s always going to be situations where fund managers can use it and in thoughtful and considerate manner to deal with, you know, late vintage fund or whatever it is that, that they’re dealing with.
I would say, though, that I do think the general macroeconomic conditions out there right now is driving kind of more situations where a NAV loan makes sense than, a continuation fund or something else that you might want to do in that situation between just the valuations, the market still being out of whack and just the general uncertainty kind of out there, it’s hard for people to kind of plan and project for the future, which impacts M&A, which then trickles, you know, up to the funds at the end of the day and creates the situations that where it might make sense to do a NAV financing.
So sorry, I can’t give you that just the straight yes or no, but it’s a little bit, it’s a little bit, squishy.
CJ Doherty:
Yeah. No. Sounds good. Good to hear the context. And, I guess my final question for you guys before we wrap up is what is your outlook for the NAV product going forward?
Aryeh Landsberg:
I would highlight continued adoption. I think we’ve seen a number of first time borrowers come into the market, appreciating that elements of deploying NAV financing to make a creative investments is not only seen as, a positive and convenient liquidity management tool for their fund and for their LPs, but is increasingly becoming a performance differentiator in that it helps turn what might otherwise be, decent or quite strong investment, returns into, something a bit more extraordinary.
And so, I think we’ll see a bifurcation between managers who are thinking holistically about their financing opportunities, and the resulting IRRs and some of the marketing statistics that they’ll be representing to their LPs and those that have it. So, I would imagine that the adoption will continue and that we’ll see another year of record deployment in 2026 and into 2027.
Ryan Moreno:
Yeah, I would agree with that. My theme would be continued understanding and adoption, because I think half the battle here is just making sure the fund managers understand the potential for this. And I think we’re going to see more bespoke structures, more concentrated portfolios. Probably the LTVs is going up a bit up on some of these deals, which just for your benefit of historically been like the 15% to 20% range.
So very healthy for a conservative. Yeah, I think the future is very bright for the NAV product.
CJ Doherty:
Great. And that’s all we have time for today. Aryeh and Ryan, thank you both for joining me. It was great having you on for such an insightful conversation.
Aryeh Landsberg & Ryan Moreno:
Thanks, CJ. Yeah, thank you CJ. Thanks, Aryeh.
CJ Doherty:
And thank you all for tuning in. As always, I invite you to check out our private market news, data and analysis at loanconnecter.com and on Workspace. Subscribe to the Lending Lowdown on your favorite podcast platform.
