Alternatives White Paper

Funding Flexibility

Exploring the Private Equity NAV Lending Opportunity for Asset Owners

28 August 2024

2 min read

What You Need to Know

Publications on private equity net asset value (NAV) loans have tended to focus on the perspective of private equity sponsors and limited partners. Here, we examine NAV lending from the perspective of asset owners, particularly insurance investors: What is NAV lending, why is it appealing, and what are the considerations in accessing the opportunity?

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Authors

Executive Summary

Since its beginnings in the early 2000s, the market for NAV lending has continued to grow and develop as a source of flexible capital for private equity sponsors and their funds. As funds advance through their investment cycles, loans backed by their underlying investments can supplement up-front capital commitments from limited partner investors.

We believe NAV loans represent a compelling proposition for many stakeholders:

Private equity sponsors have access to a nondilutive alternative capital source with multiple uses in both offensive and defensive applications.
Limited partners in private equity funds benefit when NAV loans are used to unlock value at the underlying portfolio companies.
Discerning NAV lenders with strong sourcing networks can underwrite and execute loans with attractive return potential and robust covenants.
Asset owners, including insurance investors, can add a complementary investment-grade asset class to their private market allocations.

What’s in a Name? Defining Private Equity NAV Lending

Before delving deeper into an assessment of the opportunity in NAV lending, it’s important to set out some basic terminology. For the purpose of this paper, we’ll focus on loans provided to individual private equity funds against the value of the funds’ investments in private equity (Display 1). In doing so, we’ll leave aside NAV lending beyond this segment, such as NAV loans collateralized by infrastructure, real estate, portfolios of interests in private equity funds or credit assets.

How NAV Lending Works

Illustrative NAV Loan Structure

Illustrative example only. Does not represent an actual investment.
Source: AllianceBernstein (AB)

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The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.

About the Authors

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