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By: LeAnn Chen, Haynes Boone

NAV-based financing has existed in various forms for over a decade. In recent years it has also seen significant growth in the private equity industry. Given the variety of fund strategies, there is a wide range of different NAV structures. NAV facilities for private equity strategies may differ significantly from those for secondaries funds and credit funds.

Given this rapid growth and non-uniformity of NAV facilities, it is not surprising that LPs ask questions about this product, especially where a NAV facility is used for distributions to LPs and such distributions are recallable. Around 31 percent of participants in a survey at NAVember indicated that they were aware of an LP expressing concern with the use of leverage through a NAV facility. However, publicly available sources indicate only a minority of NAV facilities have been used for distributions to LPs, with the highest estimate putting it at 20 percent and other sources citing three to five percent.

Like all other ILPA guidelines, the NAV Guidance is designed to provide general parameters for improving transparency and encouraging a more productive dialogue between GPs and LPs. Of note, the Guidance is designed to address the use of NAV facilities for private equity strategies only.

GPs vary in their communication with LPs regarding the implementation and purpose of NAV facilities. LPs sometimes learn about these facilities only through distribution notices or financi......................

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