NAVs meet margin loans: Single asset back-levering transactions and concentrated NAVs take centre stage

The markets for financial products made available to private equity, venture capital and other investment funds ("Funds") and the ultra-wealthy are ever-evolving.

Margin lending has a well-established presence in the financial markets, long pre-dating fund finance and, for that matter, Funds as we know them. Traditional margin loans rely on daily mark-to-market pricing and margin call mechanics to ensure that the agreed loan- to-value ratio ("LTV ratio") is maintained. Whether the underlying collateral is a single publicly traded security or a portfolio of securities, the mechanics are the same. The reliance on a publicly reported market price to calculate the LTV ratio renders margin loans per se ill-suited when the asset to be financed is equity in a privately held company. 

Chapters in previous editions of this book, including our own,1 have chronicled the rise of the net asset value ("NAV") lending market in the fund finance space. By enabling financial sponsors to leverage their aggregate net equity across a portfolio of assets, NAV financings provide an additional source of liquidity for sponsors seeking funding for additional and follow-on investments or to return capital to investors. An important source of comfort for NAV lenders, however, is the ability to rely on collateral support from a diverse portfolio of assets.

So, what do you do when the leverage needed is for a highly concentrated portfolio or even a single privately held asset? A bit of match-making.

In recent years, we have seen rising interest in what you might call "private margin loans" to provide financing to company founders and other high-net-worth individuals ("HNWI") collateralised by their shares in the still-privately-held companies they founded. In the Funds realm, similar loans are being used to provide "back levering" for individual portfolio investments. In both scenarios, a bespoke combination of NAV and margin lending techniques tailored to the underlying asset provide the valuation and margin maintenance mechanics and other lender protections necessary to make these loans feasible.

In this chapter, we will outline the key features of NAV facilities and traditional margin loans as well as the limitations of each type of facility when applied in the context of a single privately held asset. We will then explore the myriad of ways these features are being mixed and matched to facilitate financings for single or highly concentrated small portfolios of privately held assets.

This article was first published on GLI – Fund Finance 2024, Eighth Edition, please visit www.globallegalinsights.com.

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