In a changing economic landscape, 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 asset based 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 fund managers implementing these products in the current market.
Offensive
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.
Defensive
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.
Strategic
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 team guides market participants through potential solutions based on important considerations geared toward finding the most suitable solution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.