Loan Note: The outlook for NAV loans; the tech sector defies public market woes

The NAV loan market has been growing rapidly but underwriting needs to be more disciplined than ever in today's environment. Plus: the technology sector is still thriving in private markets and S&P highlights the woes for consumer goods companies. Here's today's brief for our valued subscribers only.

They said it

“We’re seeing a rate hike feeding frenzy. It’s the reverse of what we saw in the last decade”

James Athey, a senior portfolio manager at abrdn, quoted in the Financial Times

First look

NAV-ing a closer look
Rising interest rates may be a concern for leverage providers, but not so much those lending at fund level, delegates at the Fund Finance Association conference in London heard last month.

New NAV loans are being issued with some of the healthiest interest coverage ratios (a measure of how easily the loan might be repaid) that the market has “seen in a generation”, said one lender, in remarks reported by our colleagues at Private Funds CFO (registration required). Loan-to-value ratios are “at the moment, conservative enough to withstand a fairly significant economic downturn”, added a fund finance lawyer.

The NAV lending market has been developing at a furious rate, aided by the introduction of credit ratings for these loans, which have given insurance companies and institutional investors the assurance to enter the market. One panellist said they’d recently completed a $4 billion facility that was completely taken down onto insurance companies’ books.

Forms of asset-backed lending spiked in popularity during the worst of the pandemic as sponsors looked for capital to defend negatively impacted portfolio companies and make opportunistic add-ons. Non-bank lender 17Capital expects the NAV loan market to grow sevenfold to $700 billion by the end of the decade.

Underwriting standards have, however, got much more stringent since rates started to rise and following the war in Ukraine. “We always underwrite to hard downside cases, but… having been through [several cycles], this one feels different; feels tougher,” one lender at the event noted. “We are scrubbing extra hard.”

Tech sector proves resilient
One of the questions arising from our July/August cover story on annual recurring revenue financing was whether the battering taken by some of the larger technology companies on the public markets would have a negative effect on the popularity of software and technology investing in the private markets. The latest market update from fund manager Monroe Capital’s Capital Markets Group appears to suggest this is unlikely.

For one thing, public market turmoil is creating the opportunity for take-privates, with Monroe pointing to Carlyle’s $4.2 billion take-private of IT solutions provider ManTech and Thoma Bravo’s $6.9 billion acquisition of identity security specialist SailPoint as examples of sponsors’ appetite for more cheaply priced public technology companies.

Indeed, private equity technology investing – and the private debt lending that supports it – “will not be severely impacted despite market uncertainty”, according to Monroe. The firm points out that, while the decline in public comparables has driven down private market valuations, private equity capital has continued to flow into the sector. US PE deal activity in the technology sector was higher in the first quarter of this year than in the fourth quarter of 2021.

Perceived as resilient to macro trends, sectors such as software and technology soared in popularity during the earlier stages of the pandemic.


Conditions worsen for consumer firms
A new report (login required) from S&P Global Ratings lays bare the pressures being faced by the consumer sector, with the organisation expecting sales volumes to decline over the next few quarters.

“Consumers – particularly lower and middle-income households – will gradually cut back on discretionary spending, trade down and become more price conscious to deal with falling real incomes,” said credit analyst Raam Ratnam.

Consumer goods companies are facing constant increases in input and operating costs that they are passing on to consumers. They are trying to secure supplies and cut costs but supply chain issues are impeding efforts to bring about operational efficiencies.

The report notes that rated EMEA consumer goods companies have successfully defended their market positions so far but that confidence and spending has started to weaken due to slower economic growth, greater geopolitical uncertainty and persistent inflation.

S&P said it had taken negative rating actions on approximately 10 percent of rated companies in the European consumer goods sector in recent months.

AXA IM Alts launches wealth management drive
Paris-based fund manager AXA IM Alts and iCapital, the alternative asset fintech platform, have announced a strategic partnership to increase wealth managers’ access to private markets investing.

The partnership will start with AXA IM Alts’ $500 million Global Health Private Equity strategy, the first SFDR Article 9 fund on the iCapital platform, focused on medical devices, biopharmaceuticals, vaccines and diagnostics. The relationship will expand to provide wealth managers and clients with access to institutional-quality alternative investments including real estate, infrastructure and private debt.

AXA IM Alts says the partnership is an important milestone in its strategic expansion into the private wealth sector, as it seeks to address increasing appetite from private investors for investments into alternative asset classes. The partnership with iCapital follows AXA IM Alts’ recent appointment of Marion Redel-Delabarre as head of private wealth.

New MD for Runway
Runway Growth Capital, a provider of growth loans to venture and non-venture backed companies seeking an alternative to raising equity, has hired Jeff Goldrich as managing director, technology.

Operating out of the firm’s Chicago office and reporting directly to founder, chief executive officer and chief investment officer, David Spreng, Goldrich will originate growth and late-stage investment opportunities.

“Despite a turbulent market, dealflow at Runway is at an all-time high, and we need additional bench strength to ensure Runway is aligning with the best growth companies seeking financial support with minimal dilution,” said Spreng.

Previously, Goldrich was with technology lender CIBC Innovation Banking. He partnered with technology executives, investors and third-party diligence providers to source, structure, execute and monitor credit for growth-stage software and services firms across the US.

LP watch

Institution: Teachers’ Retirement System of Louisiana
Headquarters: Baton Rouge, US
AUM: $25.4 billion
Allocation to alternatives: 47.0%

Teachers’ Retirement System of Louisiana has committed $50 million to Hark Capital IV, a contact at the pension confirmed.

The fund, which is managed by abrdn-owned Hark Capital Advisors, will invest in North American companies and seek senior debt returns.

TRSL’s recent private debt commitments have tended to focus on global vehicles targeting distressed or subordinated/mezzanine debt returns.

Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal