Net asset value, or NAV-based loans, which are secured against the value of a private equity fund’s underlying investments, have been around for some time. Private debt lenders have been making use of the facility to juice returns on their own funds for risk-on investors seeking higher returns. While NAV loans have historically been provided by specialist lending funds and banks, the strategy is now gaining traction among private debt funds looking to supply NAV-based loans to the very sponsors drawing buyout financing from them, market sources told Debtwire. 

Ares, Apollo and Pemberton are among managers deploying from sleeves of capital to support private equity funds with NAV loans, the sources said. While Ares and Apollo are exploring the field and have made some commitments, Pemberton has both deployed and formalised the strategy. Apollo, whose US-based credit operations include NAV loans, is actively considering emulating this approach in Europe, a source familiar with the company's strategy said. However, so far none of these credit managers have raised dedicated funds for NAV-lending products, the sources said.  

Considered a neat piece of financial engineering, NAV-based lending has seen steady growth and built momentum during the global pandemic, as reported. Demand was spurred by sponsors looking for ways to manage a vintage fund that required fresh investments into its portfolio companies and, to a lesser degree, return cash to its investors.   

NAV financing as a whole is still a largely untapped market, but one which is expected to generate an annual deal flow of up to USD 145bn by 2030, according to 17Capital, one of the few dedicated NAV lenders in the space. The lender has deployed USD 2.9bn across 11 investments and estimates the market to be worth USD 18bn of deal value for this year alone.

“In order for it to continue its growth and momentum, NAV lending needs capacity. It needs validation from some more managers,” David Wilson, co-head of credit at 17Capital said. “We want this competition.” 

While multiple NAV loans have been issued, they often stay under the radar. One notable deal is Hg Capital’s GBP 455m NAV financing for its Hg Saturn portfolio, a 2018 vintage fund with GBP 1.5bn in commitments which the sponsor completed last year.   

A perfect fit 

Direct lenders are ideally placed to offer sponsors NAV facilities since they not only have existing relationships with GPs, but also NAV loan pricing tracks more closely with a typical unitranche at around 6%-9% or higher, which is less of a concern for sponsors looking at 20% IRR, sources said.  

Typically charging a lower interest, banks have cornered the market on subscription line financing – a shorter-term facility collateralized against LP commitments – but may be less willing to provide NAV loans, which are secured against unlisted and unrated assets in a private equity firm’s fund. 

“The banks have been nowhere near in terms of offering the counterpart what they're looking for. There’s definitely a lack of supply on the bank side,” Wilson noted.   

Nevertheless, banks are now offering a new type of financing of their own: backlevering, which is debt incurred on the equity portion of a sponsor's transaction, be it a specific buyout or a whole portfolio. Last week, Apollo tapped such bank debt to fund a significant portion of its equity commitment to its leveraged buyout of US-based Brightspeed, as reported by Bloomberg.  

With rising interest rates, potential recession and market turmoil, demand for NAV facilities is expected to grow further as sponsors look for ways to prolong the life of an ageing fund. The product is still new to many, sources said, despite lenders such as 17Capital providing NAV loans to first tier sponsors over the recent years.  

“It is still really bespoke for PEs and is on a case-by-case basis. Each situation is different, and it's not mainstream yet,” an advisor in the space pointed out.  

It’s certainly not for everyone, a European direct lender noted. It’s not only a low volume business at this point but also low margin and may be required by funds with both complex and concentrated portfolios as well as underlying assets of questionable quality, the lender cautioned.  

Mid-market picks

Direct lenders keen to finance a private equity-led buyout of Optegra are expected to provide initial leverage indications of 4.5x – 5x for the UK-based ophthalmology chain. Sellside advisor to Optegra’s owner H2 Equity, Lincoln International, is marketing the asset off annual EBITDA of GBP 25m – GBP 30m, but the debt story could prove tricky to get behind with its checkered past performance and Eastern European exposure. 

Also in the UK, privately owned broadcast equipment supplier, ES Broadcast, is working with Clearwater International on a sale of the company. IMs have been circulated and the asset is being marketed off annual EBITDA in the region of GBP 13m.  

In the Netherlands, EyeCare Group’s backer EMK Capital is working with Nielen Schuman on a refinancing of the optical chain to replace an equity bridge facility the sponsor used to acquire it last year. The debt advisor launched a formal process earlier this month and is guiding lenders towards structuring EBITDA of EUR 23m–EUR 25m. 

Elsewhere in the region, dealmakers are waiting in the wings for a potential sale of Luxembourg-based fund administrator Alter Domus in the coming months, as the group tests the waters with investors. Goldman Sachs has discreetly sounded out potential bidders in recent months to gauge market appetite on the company’s behalf and is targeting predominantly targeted financial sponsors 

In late September, financiers got a closer look at French financial software specialist Neoxam during a lender education. The business is being marketed off EUR 17m of EBITDA and first round bids were also collected at the end of last month.

Sponsor Vespa is pressing ahead with plans to sell France’s Cleeven, an engineering and technological consulting firm, and has appointed Oaklins to advise on the sale process. Financing for the deal is expected to be moderate, with banks looking to organise a club and lever the business at 4x. 

Trilantic Europe has lined up a EUR 90m unitranche from Eurazeo to support its buyout of the Italian nailcare e-commerce brand Passione Unghie. The new debt package levers the business at around 5x off EBITDA in the region of EUR 17.5m.

In Germany, financiers are anticipating the launch of Triton Partners-backed cloud hosting specialist dogado. Sale documents for the company with around EUR 40m of EBITDA were expected to hit at the end of last month in the Arma Partners-led transaction. 

The sale of Cloudflight is taking off with love letters submitted mid-September for the DBAG-backed IT services and software consulting company. The business is being marketed off EUR 25m EBITDA and valuations may reach a staggering 20x, implying an enterprise value of EUR 500m.

Despite some hesitancy among financiers to lend to automotive companies, sensor, wire and cable harness specialist Prettl is drawing attention from sponsors on the back of its growth in the electrical vehicle space. The Trilantic Europe-backed business is being sold off around EUR 40m of EBITDA in a Jefferies-led sale. 

In the Nordics, the sale of sex toy maker Lelo made a splash after Jefferies clinched a mandate to sell the business. Trustar Capital’s attempt at an IPO was foiled but a sale is not guaranteed either given the company’s rather unusual products, and the market might fail to convince recalcitrant investment committees. 

After quite some time, the sale of POC, a Swedish sports safety equipment maker, was put on hold by sponsor Investcorp. The offers didn’t reach the seller’s expectations for a consumer-facing business coming under pressure from inflation. Investcorp has held the cycling and snow gear maker for seven years.