Distributions generated via NAV facilities should not be viewed as a “free lunch” for investors, a conference has heard.
Speaking at the Hong Kong Venture Capital & Private Equity Association’s Asia Private Equity Forum on Friday, Eric Mason, head of private equity at the $17 billion Church Pension Fund, told delegates that using NAV facilities to create distributions increased financial risk.
“Sooner or later, you have to pay for that, right,” he said. “So, it’s not a free lunch.”
New York-based Church Pension Fund has a more than 22 percent actual allocation to private equity, according to data from affiliate title Private Equity International. It invests to generate retirement, health and life insurance benefits to employees of the Episcopal Church.
Mason, who spent 14 years in the Church Pension’s Hong Kong office before relocating to New York in 2022, said distribution trades were less common among Asia-Pacific managers than in the US.
NAV facilities have proliferated in western markets as GPs seek new ways to generate liquidity in a market starved of exits. Though distribution trades – in which a GP uses these facilities to increase DPI – are becoming more common, these loans are more often used for reinvestment or refinancing.
“There’s a lot of different structures that are happening, particularly around end of life or creative ways to generate liquidity,” Mason added. “Our portfolio, we haven’t seen as much borrowing against the NAVs to pay out distributions.”
As PEI noted in January, NAV distributions have proven somewhat controversial among LPs. Capstone Partners’ Liquidity Solutions Survey 2023 found that more than half of LP respondents view NAV financing and preferred equity as a ‘poor’ way to generate liquidity. Some take issue with the fact that these facilities can be recallable and must therefore be treated as an unfunded commitment, rather than a genuine distribution.
However, not all investors have taken issue with the use of fund finance. Joining Mason at the event, Samson Wong, chief investment officer for private markets at the Hong Kong Monetary Authority, said that the HK$4 trillion ($509.2 billion; €470.3 billion) institution doesn’t take issue with fund finance facilities provided they’re used “very prudently”.
“I have seen some GPs using that,” he noted. “It’s really down to risk management… I don’t see why we should object to that.”