Net Asset Value (NAV) Lending

Why invest in Net Asset Value (NAV) Lending

Attractive in Volatile Markets: Capitalize on opportunities during market instability.

Diversified Security: Loans secured by entire fund portfolio, offering downside protection.

Flexible Strategies: Options range from defensive to growth-oriented approaches.

Competitive Yields: Floating rates with PIK components and discounts enhance returns.

Robust Protection: Backed by diversified portfolios, low loan-to-value ratios, and seniority in the waterfall.

Resilience in Downturns: Strong downside protection minimizes losses during economic stress.

Diverse Investor Base: Includes drawdown funds, managed accounts, and insurance-rated notes.

What are the main risks of Net Asset Value (NAV) Lending

PE Fund Performance: Returns are closely tied to the success of the underlying PE funds; poor performance can impact outcomes.

Exit Timing: Delays in exiting investments can affect liquidity and returns.

Credit Risk: Although secured, there is still a risk of default if the value of underlying assets declines significantly.

Liquidity Risk: NAV loans are less liquid, making it challenging to exit positions quickly if needed.

Regulatory Risks: Changes in regulations affecting private equity or lending practices can impact loan terms and viability.

What characterizes Net Asset Value (NAV) Lending?

Industry/Sector: NAV lending is versatile, often spanning various industries and sectors. Some managers specialize, targeting specific niches to maximize returns and expertise.

Instruments: These loans are typically senior credit instruments, uniquely backed by the unrealized value of multiple private companies within PE funds, offering a broader security base.

Maturity Profile: Loans generally have a lifespan of five to seven years, though refinancing often shortens this to three to four years, providing flexibility in dynamic market conditions.

Credit Quality: Borrowers usually have credit ratings below investment grade, indicating moderate to higher risk, yet offering potentially higher returns.

Interest Rate Risk: Interest rates are typically floating, tied to a reference rate like SOFR, minimizing rate risk and aligning with market fluctuations.

Borrower Size: NAV lending primarily serves middle-market borrowers, categorized by EBITDA, offering tailored financial solutions to support growth and stability.

Return Profile: Returns are driven by contractual yields, fees, and discounts, historically outperforming broadly syndicated loans and offering an attractive yield profile.

ESG Considerations: Varies by strategy, but can incorporate ESG factors, avoiding sectors like weapons and energy, and focusing on sustainable and responsible investments through screening processes.

Question 1.  Which regions do you currently see as offering the most attractive opportunities in NAV financing, and what factors are driving this?

HSBC Asset Management

We see great opportunity in the European market, focusing on mid-market Private Equity sponsors. The NAV financing market has evolved rapidly in the region with GPs and LPs gaining comfort with the financing solution as a tool to continue to support growth in underlying portfolios, and with recent ILPA guidelines seen as a positive to provide clarity. There is an increasing need for more capital, including from non-Bank lenders like ourselves, especially in bespoke solutions to be able to solve for specific capital needs, as GPs and LPs navigate a different environment.  We are also excited by the opportunities being presented in the Asian market, as NAV financing is becoming a more topical solution for GPs and for investors of private asset portfolios. 

Question 2.  How do your sourcing capabilities give you an edge in accessing attractive NAV financing opportunities?

HSBC Asset Management

HSBC Bank is a strong part of the Private Equity eco-system in both Europe and Asia, as a Banking partner to many founders, GPs and LPs.  HSBC is also a key player in the fund finance market, with a long and credible track record in providing innovative solutions to clients. Through this network and our partnership with the Bank, we have the ability to source attractive opportunities, and typically at an early stage.