NAV financing continues to be the “hot topic” in fund financing, according to a new report from law firm Macfarlanes.
Macfarlanes’ Private Capital Review 2024 highlighted a number of areas of growth in the private capital space, and NAV financings were deemed to be among the most attractive areas for GPs.
The review found that NAV financings are becoming more important in providing liquidity to funds for event-driven purposes, including the funding of final acquisitions for a particular fund vintage, funding follow-on investments, distributions to limited partners and the transition of assets to secondary funds.
Read more: Investors wary on NAV financing for distributions
“They are therefore increasingly coming to be viewed as an integral part of a fund’s financing strategy,” said the firm.
“However, there can be tensions between GPs and LPs in respect of the use of NAV financing, which (to a greater or lesser degree) relate to what some LPs observe is a lack of transparency by GPs as to NAV usage and its impact on performance.”
The authors of the review added that communication is key to ensure that all participants are comfortable with the implications of the additional leverage provided by NAV financing.
NAV financing has become increasingly commonplace in the private credit sector, with a number of GPs entering the space this year. Last month, HSBC Asset Management launched the first vintage of its NAV financing strategy, while Pemberton Asset Management confirmed that the first close of its NAV financing fund in July, with more than $1bn (£770m) raised.
Read more: NAV finance: Behind the headlines
NAV financing refers to loans secured against the net asset value of a fund, providing liquidity based on underlying assets.
Macfarlanes noted that the recent popularity of NAV financing may be due to the lack of liquidity in the fund finance market over the last 12 to 18 months.
In addition to NAV financing, Macfarlanes has seen a slight increase in the number of subscription line financings. However, the law firm added that borrowers continue to find that they are more complex to source than historic standards.
Read more: Funds begin using unsecured NAV financing