Benefits and Considerations of Family Office NAV Credit Facilities
Executive Summary
Net asset value (“NAV”) credit facilities continue to grow in popularity, not only with traditional private equity funds, but also with family offices. NAV credit facilities offer several benefits to both family offices and lenders, but parties should carefully consider the following to avoid potential complications:
- Structure of the NAV credit facility
- Collateral and borrowing base calculations
- Transfer restrictions of the underlying assets
Background
Family offices are legal structures established by high-net-worth families to manage wealth and provide other services, including tax, wealth, and estate planning. Such family offices invest in a broad range of assets, including real estate, private equity and venture capital interests, marketable securities (e.g., fixed income or listed equities), and other alternative investment strategies. To finance these investments, family offices often require access to credit facilities that are tailored to their unique needs and strategies.
Like private equity funds and institutional investors, family offices are increasingly seeking to establish NAV credit facilities, including to fund investments and operating expenses. A NAV credit facility is a term or revolving credit facility in which a lender provides financing to a borrower, with the amount of loan availability being based on the net asset value of the borrower’s portfolio of investments. Under a NAV credit facility, the lender may seek to receive a security interest directly over the family office’s investment assets (e.g., a pledge of interests in a subsidiary vehicle established to hold the investments or a securities account holding such assets) or a security interest that is merely supported by those assets (e.g., a pledge of deposit accounts into which investment proceeds are paid). The collateral pool in a transaction involving a family office borrower will vary on a deal-by-deal basis depending on an analysis of the family office’s structure and the nature of the assets themselves.
As family offices continue to expand their investment portfolios and seek alternative financing options, NAV credit facilities are becoming a crucial tool in their financial arsenal.
What You Need to Know About Family Office NAV Credit Facilities
Benefits of Family Offices Using a NAV Credit Facility
The past few years have seen a steady rise in both the number of NAV credit facilities and the number of family offices seeking debt financing for liquidity. The key benefits of family office NAV credit facilities include:
- NAV credit facilities give family offices additional liquidity by leveraging the assets under their management. A family office can unlock liquidity from typically illiquid assets and optimize their investment portfolio’s performance by increasing the capacity to fund follow-on investments, pay taxes or other costs in succession, make new investments, fund capital calls, right side allocations (e.g., for debt servicing payments, pension obligations, etc.), and other similar funding needs without resorting to traditional liquidity events such as selling an investment or calling capital.
- Family office borrowers can expand their pool of investments free of investment period limitations. While traditional private equity funds have a fixed term and can only acquire investments that contribute to the borrowing base during an investment period, funds set up for use by family offices are typically evergreen and free from such investment period limitations. Family offices, therefore, have more flexibility in calling capital and drawing upon its existing credit facilities to acquire additional investments and further expand the pool of investments that can contribute to its borrowing base in a NAV credit facility.
- Lenders have access to a larger pool of potential borrowers. Facilities of this type have granted lenders access to a new category of potential borrowers in a challenging lending environment and the ability to offer a new product to current clients.
Things to Consider When Using a NAV Credit Facility
Lenders and family offices that enter into a NAV credit facility should consider:
- Structure. Family office-managed funds do not always hold interests in a way that is conducive to typical NAV securities. For instance, family offices may hold assets directly, instead of through a special purpose vehicle (“SPV”). While enforcement of a pledge in the equity of an SPV through which a fund holds its assets may be accomplished through a sale of such equity to repay outstanding obligations, an attempted sale of family office assets would involve a cumbersome sale process to dispose of each pledged asset individually, as well as potentially posing legal complications if family office assets are sold to buyers outside of the family, including the potential loss of family office status under the ‘40 Act.
- Calculation of NAV. Since family offices are not registered investment advisers, they may choose not to obtain audited financial statements, making it difficult for lenders to determine the true value of the pledged collateral. In these situations, lenders often seek to include a right to independently calculate NAV or challenge a family office’s internal NAV calculations in the credit facility documentation.
- Transfer Restrictions. NAV credit facilities have traditionally posed some challenges to lenders due to the potential for direct or indirect transfer or pledge restrictions in the operating documentation of the underlying investments. This concern may be exacerbated by the fact that family offices tend not to hold assets through an SPV. To counteract this, lenders may seek a pledge of accounts into which such assets are custodied, rather than a direct pledge of equity.
Next Steps
We expect a steady rise in family office NAV credit facilities as the market explores non-traditional borrowers in a high-interest-rate environment. NAV credit facilities offer several benefits to both family offices and lenders. Still, parties should carefully consider the facility’s structure, collateral and borrowing base calculations, and transfer restrictions with their legal counsel to avoid potential complications. For additional information:
