ILPA’s Prunier says ‘vast majority’ of LPs don’t support using NAV loans

The NAV loan market has been a hot point of interest among the fund finance community recently. But investors’ discomfort with the debt led to pointed remarks at the Fund Finance Association’s global symposium in sunny Miami Beach in late February.

Neal Prunier, senior director for industry affairs at the Institutional Limited Partners Association, aired reservations of the trade group’s members during a panel about lending to buyout funds at the confab.

FFA’s policy forbids attributing speakers at its conferences by name, but affiliate title Private Funds CFO obtained Prunier’s permission to cite him.

While he said that LPs aren’t monolithic, the “vast majority” of them don’t support using NAV loans due to poor communication and over how the debt is being used.

“The reason for that today is because of a real problematic lack of transparency and rationale into the use of NAV-based facilities that we see coming up,” Prunier noted.

He cited some cases in which disclosure was completely non-existent.

“Often they find out about the use of a NAV-based facility after the fact and only through in-depth reading of disclosures and financial statements – not by being told up front and not by even being told after the fact,” Prunier explained. “So there has been some bad behavior that has caused some of these frustrations and that’s something that we want try to improve upon within the industry.”

ILPA president Jen Choi echoed Prunier’s perspective when Private Funds CFO recently interviewed her ahead of PEI Group’s NEXUS conference, which is March 6 – 8 in Orlando.

Prunier also noted that using NAV loans to fund distributions draws particular concern from investors.

“Where there is the most consensus of LPs not liking the use of NAV-based facilities, it’s for early distributions, especially when those distributions are recallable,” he said. “That has very close to unanimous support as far as being against it.”

Prunier’s visit comes as ILPA is nearing the release of its guidance on NAV loans. He said that it’s expected to be published in May and will cover three areas: education, “guard rails” such as transparency and handling LPA language.

In defense, and a look ahead

Market participants at the annual meeting defended the product while also voicing support for disclosure.

“Every tool, financial tool or otherwise – can be used for good or for evil,” a NAV lender said at a panel.

This panelist, who also agreed with a need for transparency, noted that other instruments received similar concern when they were emerging.

“Any new product always arouses suspicion,” he noted. “It was the same thing with capital call lines, it was the same thing with continuation vehicles, and so that’s just a natural part of it.”

Educating LPs on using NAV loans was raised as a way to win over their support. An attorney who spoke at one panel said educating GPs about the facilities was a long-time struggle, but has since paid off.

Another NAV lender, who spoke at a different panel, explained that getting GPs and LPs on the same page is a challenge to address.

“There’s still a lot of understanding and productive discussion to be had amongst GPs and LPs on what is the right way to do these deals, what is the right way to structure an LPA versus what gets approved at, say, an LP board level,” he said.

In making the case for NAV financing, this speaker said the debt increases sponsors’ investment opportunities.

“It’s enabling firms and GPs really to capture growth-oriented opportunities that they otherwise wouldn’t be able to do,” he said.