What is the situation?
Buy and build strategies are becoming more and more common in Private Equity as trade buyers look for businesses with real scale, which in turn command higher multiples.
However, continuing the strategy and supporting the business and management team throughout the life of the fund is challenging. This can mean exiting before full value is achieved or turning away value generative opportunistic follow-on investment. Whilst General Partners (GPs) could use Limited Partner (LP) co-invest this may generate conflicts of interest or be inefficient due to the size of the follow-on need. Preferred equity is another route a GP could take however the need may not suit an equity returns cost of capital. Subscription financing may be maxed out or unavailable on the basis that the fund does not have the undrawn commitment collateral needed.
Our flexible approach
To support our clients, we have developed “NAV Financing”. This is flexible capital that blends senior debt and equity risk in a low touch structure to provide Funds or GPs with liquidity for value creation opportunities.
Recent Investec NAV Financing transactions
In Q2 2018 Investec Fund Finance supported a mid-market European GP with NAV Financing to quickly act upon an opportunity which had significant upside for the Fund and its LPs. Whilst the Fund was in its divestment period – its schedule of exits (and therefore liquidity from recycled LP commitments) did not match with this investment opportunity and it needed capital to bridge across a period of 12 - 18 months. The structure we provided enabled the GP to act quickly, avoid dilution of the LP equity whilst also allowing for flexibility in prepayment.
Q2 also saw the successful exit of a NAV Financing investment, providing the GP with a return of over 2x Money Multiple (MM). NAV Financing was provided to a GP who had the opportunity to invest more alongside a mature co-invest opportunity in a Fund asset. The GP wanted to further create alignment with its LPs by putting its own capital into the co-invest opportunity, however this was challenging given the material commitment the GP makes to its Funds. To unlock the opportunity, we were able to structure a flexible medium term facility which bridged to a liquidity event in the underlying business. This was achieved this year, generating a >2x MM for the GP within a year of the co-investment.
Does NAV Financing have an application for me?
GPs and their funds find themselves at a time when traditional debt and equity are easy to find, however NAV Financing fills a spot that sits between these two well-known pillars and provides yet another capital solution for funds, GPs and their LPs.
We would be very happy to speak to you whether you are a GP, LP or an advisor on creating a bespoke NAV Financing solution to help you or your clients seize opportunities and develop a meaningful partnership to help achieve growth.