NAV financing: volumes increase but total value falls

Rede Partners’ 2023 Lender Survey has found that the majority of lenders surveyed, 83%, reported an increase in the number of NAV transaction opportunities in 2022, marking a 5% rise from 2021. The data suggests that the average lender received 21 NAV financing deals in 2022, a 31% increase over the estimated 16 seen in 2021.

However, the overall value of NAV lending deals completed in 2022 was $21bn, representing a fall of approximately 12.5% since 2021, where the estimated total deal value was $24bn. This is in contrast to leveraged loan issuance in the US and Europe, which fell 24% and 44%, respectively.

Margin increases during the last 12 months were found to be modest, allowing sponsors to capture market arbitrage. More than 75% of lenders did not increase pricing by more than 200bps in 2022 – while 6% of lenders lowered their margins.

According to Rede’s NAV Financing Market Report 2022/23, the lower-than-expected margin increase over 2022 and the pulling back of recourse light structures may be related, as sponsors are actively choosing to opt for more secured facilities with additional covenants to bring down the cost of capital. Throughout 2022, 77% of lenders recorded a drop or flattening in deal volume for deals without step-in rights. 

Commenting on the findings, Magnus Goodlad, partner at Rede, said: “Although the total value of deals completed in 2022 appears to have plateaued, this is likely to be temporary. The volume of transactions brought to market has increased, and NAV financing transactions are being contemplated more and more by sponsors for various uses. With this increased interest, while sponsors tapping the market over the past two years have enjoyed an early-mover advantage, we predict that we will also see the proliferation of new participants with novel structures entering the space.

“Looking to the near future, we believe that we’ll see an increase in both deal volume and value in 2023. With a full pipeline of opportunities, Rede is expecting a busy year ahead.”

For more on the state of NAV financing, check out our recent analysis of the market here, and our latest Fund Finance Tracker here.

In March 2023, Rede surveyed 50 banks, credit funds, limited partners and insurance companies. The survey consisted of 10 questions designed to provide a comprehensive understanding of the market. The participants were 72% non-banks (credit funds, limited partners, insurance companies and other lenders) and 28% banks​.

The market statistics (i.e. completed deal value and volume of deals) are defined as NAV financing facilities applied at the level of a fund, backed by all or part of the portfolio of equity positions of direct private equity, venture capital, or growth equity funds. This definition does not include facilities lending to the general partner/management company, fund-of-funds or secondary portfolios.