Private equity keeps innovating

Buyout firms get their hands on NAV financing

Happy Sunday. Let’s get started:

Private equity has always been one of the more creative corners of finance, and this year’s growth in net asset value (NAV) loans is just more of the same.

It’s a formerly niche lending product that’s exploded in popularity, with sponsors now deploying it to solve sticky issues within the portfolio, squeeze out some additional IRR, or just provide liquidity.

What is NAV Lending?

In NAV financings, a lender provides a fund with a credit facility secured by the equity value of the fund’s total portfolio, in contrast to typical debt financing at the operating company level.

Historically, NAV facilities were simple liquidity solutions limited to credit and secondaries funds, which have more liquid underlying assets to collateralize. Now, however, direct investors have barged their way in and convinced lenders to let them borrow against their funds’ portfolio companies. They’ve also figured out how to make the most of their new funding source.

NAV financing provider 17Capital.

The 17Capital team has taken an early lead among NAV loan providers

What’s the Point?

In the latter stages of a fund’s lifecycle, the sponsor has typically deployed a majority of available capital commitments. With no equity left, what’s an enterprising sponsor supposed to do if it needs some extra cash within the portfolio?

Situations requiring a splash of cash:

• Financing for a follow-on acquisition that the portfolio company can’t take down on its own

• Curing a covenant breach or otherwise propping up a struggling PortCo

• Refinancing PortCo-level debt that may be maturing with limited options

• Funding hefty capital expenditures beyond what a PortCo can handle on its own

When other capital isn’t available on attractive terms, funds can bridge the gap by drawing on a NAV facility. It’s particularly useful for troubled companies within the portfolio, who, on their own, would either face significantly higher financing costs or be unable to borrow at all.

Plus, it’s quick capital. The underwriting process for a NAV loan is typically faster than a traditional portfolio company financing, which is always a positive.

Engineered Returns

NAV financings are proving the latest strategy in a sponsor’s financial engineering playbook.

Firms that want to play games with their returns math are using these facilities to accelerate distributions to investors ahead of an exit, boosting their IRR. It’s essentially a backward version of a fund’s subscription facility, used to temporarily fund deals ahead of a capital call — both tactics serve to shorten the length of time that LP capital is deployed.

Even better, sponsors that really want to spice things up have been using NAV financing to cram additional investments into the portfolio near the end of the fund’s life. Might as well toss in an extra portfolio company if you’ve now got the means.

Is This Going to Start Blowing up Funds?

Not likely.

Those could be famous last words, but most NAV financings are quite conservative. Lenders will typically only fund up to 30% of a portfolio’s value, which leaves plenty of cushion in case things go south.

17Capital, one of the leading providers of NAV financing, claims it has never taken a loss across more than 91 investments and 46 exits. That was good enough for Oaktree, which picked up a majority stake in the firm last year.

What’s Next?

Jasen Yang, a managing director within Apollo’s structured credit group, sees a path to rapid adoption, likening the strategy to subscription lines five years ago, a once niche solution that quickly became “more socially acceptable.”

For now, debt capital markets and sponsor coverage bankers have taken it upon themselves to hasten the acceptability — they’re busy calling on clients to pitch the solution, hoping to find some action in a slow market.

DEALS, DEALS, DEALS | Last week's notable transactions

1. Warburg and Centerbridge dive headfirst into a messy regional bank salvation.

• This year’s banking disruptions aren’t over yet, and private equity is here to sniff out some deals. Banc of California and PacWest announced a merger, with Warburg Pincus and Centerbridge contributing $400 million for a 19% stake in the combined business (plus some warrants).

• PacWest’s deposits cratered 18% YTD and the bank had been working hard to shore up liquidity over recent months, selling real estate loans, offloading an asset-backed loan portfolio to Ares, and lining up a facility from Apollo.

• That meant a jump in low-yielding cash & liquid securities to preserve confidence and prevent a bank run, but turned the business upside down — PacWest was borrowing at higher rates than it was lending at (the opposite of how a bank is supposed to operate).

• This week’s deal reduces the need for quite so much cash on hand and includes a plan to pay down $13 billion of PacWest debt. The goal is to swap out pricier wholesale borrowings with lower-cost financing, beefing up the bank’s interest margin.

2. Sculptor Capital Management, formerly Och-Ziff, calls it a day.

• The hedge fund agreed to a $639 million acquisition by Rithm Capital, marking the end of one of the earliest managers to take itself public.

• It’s been a rough go of it, with a $412 million fine for violating the Foreign Corrupt Practices Act, a top lieutenant landing in federal prison, and founder Daniel Och finding himself in the middle of a nasty power struggle.

• In the 15 years since IPO, Sculptor’s multi-strategy fund managed only a 5% annualized net return — across all strategies, clients received $16.8 billion of returns, while the firm took home $12 billion. Probably not the economics that were marketed during fundraising.

3. On Monday’s earnings call, Biogen CEO Chris Viehbacher was asked about M&A potential. His response: “we’ve got, I think, about $7.3 billion in cash?”

• Then, on Friday, Biogen announced the acquisition of Reata Pharmaceuticals for $7.3 billion.

• The deal got done at a 59% premium to Reata’s closing price and sets Biogen up to lead the commercialization of Reata’s Friedreich’s ataxia therapy Skyclarys, approved in February and projected to hit peak sales of $1.5 billion.

• It’s a solid deal for Biogen, who historically has not been overly acquisitive. Skyclarys fits Biogen’s rare disease focus and helps offset declining sales from its core multiple sclerosis products (not to mention its Alzheimer’s missteps).

The rest of the deal sheet…

Kelso and Juggernaut Capital are prepping an exit for consumer health business Foundation, having hired advisors to explore options that could include a $4 billion sale.

Thales (OTC:THLLY) has agreed to acquire Imperva, a cybersecurity firm, from Thoma Bravo for $3.6 billion.

Reinold Geiger, chairman and controlling shareholder of L’Occitane, is reportedly considering a take-private of the beauty brand, currently trading at a $4 billion market value.

Vodafone (NASDAQ:VOD) is seeking to sell its Spanish unit, with Warburg Pincus, Apollo, and Telefonica reportedly interested in the business that could be worth up to $4 billion.

Bain Capital, in partnership with Valeas Capital Partners, invested in donor-advised funds software provider Ren.

General Atlantic has invested $160 million into MAC Hospitals, a Mexican hospital operator backed by Actinver and PineBridge.

TC Energy (NYSE:TRP) reached an agreement to sell a 40% interest in two U.S. natural gas pipeline systems for $3.9 billion to Global Infrastructure Partners.

Bain Capital agreed to purchase a 90% stake in Adani Capital and Adani Housing for $120 million in primary capital, along with $50 million in non-convertible notes.

Haveli Investments and General Atlantic acquired cloud ERP provider Certinia from Advent International and Technology Crossover Ventures.

Oaktree acquired Magnolia Wash Holdings, a car wash chain owned by A&M Capital.

GTCR acquired Once For All, a provider of supply chain SaaS solutions backed by Warburg Pincus.

Altice (NYSE:ATUS) is looking to offload its business news unit Cheddar, acquired in 2019. Goldman Sachs has been handed the mandate.

Public Storage (NYSE:PSA) reached an agreement to acquire Simply Self Storage from Blackstone Real Estate Income Trust for $2.2 billion.

Lyft (NASDAQ:LYFT) is reportedly considering strategic options, including a sale, for its bike and scooter segment.

Safran reached an agreement to acquire Raytheon Technologies' flight controls division for $1.8 billion.

Kering reached an agreement to buy a 30% stake in fashion brand Valentino for $1.9 billion. As part of the deal, Kering secured an option to purchase the remaining part of the business from Mayhoola before 2028.

• Saudi Arabia's PIF and miner Maaden have partnered to acquire a 10% stake in Vale’s base metal division for $2.6 billion. Concurrently, Engine No. 1 will also purchase a 3% stake.

Venture & Growth

Low Carbon, a renewable energy business, secured a £400 million investment from Massachusetts Mutual.

Field, a battery tech developer, raised £200 million from DIF Capital Partners.

OneTrust, ESG data provider, raised $150 million from Generation Investment Management.

Bunq, a Dutch fintech, raised $111 million at a $1.8 billion valuation from Pollen Street Capital, Raymond Kasiman, and Ali Niknam.

RapidAI, an AI-powered clinical decision support platform, raised $75 million in Series C funding led by Vista Credit Partners.

Solink, an enterprise physical security firm, raised $60 million in Series C funding led by Goldman Sachs, with participation from OMERS Ventures and BDC IT Ventures.

Ossium Health, a cell-therapy developer, raised $52 million in Series C funding led by CPMG, with participation from Vivo Capital, First Round Capital, Manta Ray Ventures, Alumni Ventures, and Asahi Kasei.

GlossGenius, a salon management software provider, raised $28 million in Series C funding led by L Catterton, with participation from Bessemer Venture Partners and Imaginary Ventures.

Croissant, a fintech focused on consumer luxury fashion resale, raised $24 million in seed funding from Portage Ventures, Third Prime, BoxGroup, 25madison, Twelve Below, George Roberts and Henry Kravis.

FUNDRAISING | Buyout, growth, credit & venture

Goodwater Capital raised $1 billion across an early-stage fund and special situations fund.

Main Sequence held a A$450 million first close for its third fund.

Comvest Partners raised $2 billion for its latest credit fund.

A/O has raised €100 million out of a targeted €250 million its second venture fund.

Bansk Group raised an $800 million debut fund focused on consumer investments.

Certares Management raised a $284 million real estate hospitality fund.

KKA Partners raised €230 million for its second fund.

THE READOUT | Worth your time

1. How did Google manage to develop the tech driving today’s AI boom, but then fall so far behind everyone else?

• In 2017, a group of researchers produced “transformer,” an architecture that powers OpenAI, Bard, Midjourney, and pretty much everything else. Then, they all left Google. (Check it out: FT)

Engineers examine Google's Transformer architecture presentation.

Transformer presented: it’s a shame that no one will ever look at your Excel models like this

2. Physician practice management interest has cooled for healthcare investors, but we’re now seeing the impact of prior consolidation.

• The NYT discusses a UC Berkeley research paper that outlines exactly why private equity loved the MSA-targeted clinic roll-up strategy (hint: prices get jacked up). (Check it out: NYT)

3. GIC says private equity is dead, but infrastructure can still build you some returns.

• Singapore’s $700 billion sovereign wealth fund released its annual report with some bad news for buyout investors, believing rising rates and saturation have doomed the asset class.

• But, they did say global infrastructure spend will top $3.9 trillion per year through 2040, and GIC plans on getting a piece of it. (Check it out: GIC Infra Strategy Feature)

4. Turns out AlixPartners is good at more than just executing layoffs.

They can also conduct surveys on the latest trends in executing layoffs — take a look at their annual restructuring survey. (Check it out: AlixPartners)

Thanks for reading, catch you guys next week. Drop a line with any feedback or scoops (just reply here; kept anonymous).

— Sam

Transacted thanks our partners for their support, which has no influence on editorial content. You’re receiving this email because you signed up for newsletters from Transacted. Was this email forwarded to you? Sign up now to get Transacted in your inbox.