Loan Note: NAV loans on the rise; office downturn hits Goldman private portfolio

NAV loans may be an expensive form of financing, but they're on the rise. Plus: office losses hit Goldman portfolio; and Carlyle backs auto finance platform. Here’s today’s brief for our valued subscribers only.

They said it

“Roughly two-thirds of the $1.4 trillion US leveraged loan market was unhedged at the end of 2021, after which hedging costs skyrocketed”

Taken from Oaktree Capital Management’s Performing Credit Quarterly 2Q2023

First look

On the rise: NAV loans set to reach $700bn (Source: Getty)

NAV loan need-to-knows
Pop quiz: which niche segment of the private markets industry is predicted to grow sevenfold to $700 billion by the end of the decade? Answer: the NAV loan market. That’s according to 17Capital, which, we should point out, has a vested interest in this market growing. Still, more brand-name GPs are using such facilities to accelerate liquidity back to LPs and help increase DPI.

The slow fundraising environment has muted demand for subscription credit lines, and attention is shifting to the market for NAV finance, where the loans are supported by the consolidated equity value of the portfolio.

Will rising interest rates curb demand? Our colleagues at Private Funds CFO have spent the last few months digging into this question – and many others – and concluded that opinions are mixed. Some, like Jamie Mehmood, a partner at Deloitte, say that the weaker exit environment, spurred by the higher cost of borrowing, inflation and a decline in public market valuations, has led to sponsors seeking alternative ways to return capital to LPs – including via NAV loans.

Conversely, as NAV loans have become more expensive, they’re less likely to be used to distribute capital back to LPs, and more likely to be used to help with value creation in a portfolio. With the cost of a NAV loan now higher than the 8 percent hurdle rate of a fund, taking on an expensive form of financing is only economical if you know the returns that will be made in the long run will be higher, said Jonathan Harvey, head of relationship management, fund solutions, at Investec.

Sign of the times
New York-based investment bank Goldman Sachs reported $305 million of losses in its private portfolio, primarily due to write-downs of office properties, chief financial officer Denis Coleman told investors on an earnings call – as reported by our colleagues on Real Estate Capital USA.

Debt investment revenues also declined year-over-year because of weaker performance in real estate markets, he added. The earnings call also highlighted – for the first time – the firm’s $178 billion loan book. Only 15 percent, or $28 billion, of the loans were exposed to commercial real estate, with only 1 percent of that to office – that percentage is down from just over 18 percent at the same time last year.

Carlyle joins LDC in Evolution driving seat
Auto finance is an investment area attracting considerable interest from private debt managers, and Carlyle has supported positive views of the market with its acquisition of Evolution Funding, which describes itself as the UK’s largest used auto finance platform.

Evolution connects car dealers and auto finance providers with sources of lending and says its funding platform is “widely embedded” across UK automotive dealerships. In the last year, it has enabled nearly 150,000 financing transactions and has a total platform volume of more than £2 billion.

Carlyle is investing alongside existing Evolution backer LDC and is committing equity from Carlyle Europe Technology Partners, a €3 billion fund that invests in technology companies across Europe.


Multiple supporters for ESG transparency initiative
Transparency around ESG in the credit market looks to have taken a step forward, with various endorsements providing a boost to the ESG Integrated Disclosure Project.

Three credit rating agencies – KBRA, Moody’s Investors Service and S&P Global Ratings – have all joined the ESG IDP executive committee. In addition, three trade bodies – the Asia Pacific Loan Market Association, European Leveraged Finance Association and Investment Consultants Sustainability Working Group US – have confirmed their support for the initiative.

The ESG IDP is an initiative that brings together lenders in the private credit and syndicated loan markets in an effort to improve transparency and accountability around ESG, for example by harmonising and consistently disclosing key ESG indicators.

It was formed by the Alternative Credit Council, the Loan Syndications and Trading Association and the Principles for Responsible Investment, along with a group of credit investors and alternative asset managers.

Two health tech hires at Union Square Advisors
Ted Smith, a co-founder, partner and president at Union Square Advisors, announced the expansion of Union Square’s healthtech team with two new hires: Ezequiel Navar and Alexander Despo.

Navar, a new managing director, will lead the healthtech practice. He has more than 25 years of investment banking experience, most recently (according to his LinkedIn page) with Crosstree, a bank that serves mid-market and growth concerns in the healthcare space. Navar was a managing director there. He has also filled such roles for JMP Securities, H2C and GCA Savvian.

Smith praised Navar’s “comprehensive healthcare domain knowledge base across providers, patients, payers and pharma”.

Despo becomes a vice-president at Union Square. He, like Navar, arrives from Crosstree, where he headed healthtech. Despo also has investment banking experience at Jefferies, Houlihan Lokey and Johnson Rice.

LP watch

Institution: Quincy Retirement System
Headquarters: Quincy, US
AUM: $810.1 million

Quincy Retirement System has committed $4 million to Torchlight Debt Fund VIII, according to recently published meeting minutes.

The fund launched in May 2022 and held a first close in December 2022 on $858.3 million. The real estate sector-focused fund has a senior debt strategy that covers the North American region.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.

Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing