NAV credit facilities see significant growth, Citco says
28 February 2023 US
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Research from the Citco group has reported exponential growth importance in the net asset value (NAV) credit facilities of alternative investment funds since the COVID-19 pandemic.
The NAV credit facility is a loan to an alternative investment fund offered by banks, insurance companies and speciality private lenders and secured by the fund’s investments.
Outperforming the 7 per cent growth of secondary trading of assets as a means of creating liquidity, the NAV credit facility saw annual growth of approximately 30 per cent between 2019 and 2022.
With a current estimated global size of less than US $100 billion, Citco estimates that, if current growth rates continue, the facility could reach more than $600 billion by 2030.
Historically, institutional investors have used the NAV credit facility as an alternative to a sale of assets on the secondary market to reduce the risk of a loss. The facility is now being recognised as a way to generate interim liquidity and “realise assets in an orderly manner over time,” Citco says.
Following a more difficult asset sales landscape, with central banks tightening financial conditions and the private equities market’s exit to investment ratio hitting a ten-year low, the NAV facility is an attractive prospect.
Michael Peterson, managing director of Citco Capital Solutions, says: “During the 2008 financial crisis, NAV facilities were primarily used for fund-of-funds, which are investment vehicles that pool capital and invest in underlying strategies managed by third-parties. Unlike leveraged loans, high-yield bonds or residential mortgages, NAV facilities enjoyed favourable credit outcomes during the crisis, with minimal defaults and losses.
“For alternative asset managers, a prudently structured NAV facility provides liquidity, helping a manager to fulfil its fiduciary duty to its investor clients. For lenders, they provide a secure, low loan-to-value credit structure with a diversified collateral pool and favourable alignment of interests. Systemically, these facilities serve as a safety valve for alternative investment vehicles, facilitating the efficient allocation of capital that underpins the global economy.”
The NAV credit facility is a loan to an alternative investment fund offered by banks, insurance companies and speciality private lenders and secured by the fund’s investments.
Outperforming the 7 per cent growth of secondary trading of assets as a means of creating liquidity, the NAV credit facility saw annual growth of approximately 30 per cent between 2019 and 2022.
With a current estimated global size of less than US $100 billion, Citco estimates that, if current growth rates continue, the facility could reach more than $600 billion by 2030.
Historically, institutional investors have used the NAV credit facility as an alternative to a sale of assets on the secondary market to reduce the risk of a loss. The facility is now being recognised as a way to generate interim liquidity and “realise assets in an orderly manner over time,” Citco says.
Following a more difficult asset sales landscape, with central banks tightening financial conditions and the private equities market’s exit to investment ratio hitting a ten-year low, the NAV facility is an attractive prospect.
Michael Peterson, managing director of Citco Capital Solutions, says: “During the 2008 financial crisis, NAV facilities were primarily used for fund-of-funds, which are investment vehicles that pool capital and invest in underlying strategies managed by third-parties. Unlike leveraged loans, high-yield bonds or residential mortgages, NAV facilities enjoyed favourable credit outcomes during the crisis, with minimal defaults and losses.
“For alternative asset managers, a prudently structured NAV facility provides liquidity, helping a manager to fulfil its fiduciary duty to its investor clients. For lenders, they provide a secure, low loan-to-value credit structure with a diversified collateral pool and favourable alignment of interests. Systemically, these facilities serve as a safety valve for alternative investment vehicles, facilitating the efficient allocation of capital that underpins the global economy.”
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