Alpha Launches a New Fund Finance Report Revealing the Truth About NAV Facilities and ‘Leverage on Leverage’ Criticism

LONDON--(BUSINESS WIRE)--Alpha Group International plc (LON:ALPH) today announced the launch of its new fund finance report. Harnessing data from its Alpha Match platform, this is the only report of its kind to aggregate heads of terms data to explore the risks of NAV financing. The findings dispel common assumptions and help to alleviate concerns around GPs taking on too much debt, as well as how cautious lenders are when providing these facilities.

The total fund finance market is estimated to be worth $1.2trn, according to a recent Ares whitepaper. Of that total, NAV lending represents around $225bn (18.75%), with the bulk of that amount attributable to secondaries NAV ($175bn), and just $50bn for single fund NAV facilities – the focus of this report. Furthermore, Ares estimates that NAV loan usage remains limited at less than 3%.

Despite NAV facilities representing a relatively small proportion of the fund finance market, the use of these loans has come under fire in recent years, with the main criticism focused on what the Bank of England labels as ‘leverage on leverage’. This resulted in the PRA demanding banks review and assess their current practices regarding their private markets lending activities. The Institutional Limited Partners Association (ILPA) also published NAV guidance to its members, with a particular focus on communication between LPs and GPs, as well as documentation.

Crucially, all existing reports on the use of NAV facilities have been based on survey and qualitative research. NAV facilities have never been tested at scale. Against this backdrop, we have developed a new report, harnessing data from Alpha Match, to explore the effects of using a NAV facility during a period of stress. By aggregating heads of terms data, we are able to explore the risks of bringing in this particular kind of financing. The results might surprise you.

The report covers:

• A breakdown of how LTVs vary across facility size
• LTV by the number of assets
• LTV by lender type
• LTV sensitivity testing

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By responding to the leverage on leverage criticism, this report benefits both fund managers (as borrowers) and their investors in better understanding the impact of NAV facilities on a fund. It provides an independent, data-led overview of the current fund finance market for both GPs and LPs to better understand these facilities and help with deciding whether or not a NAV loan is appropriate.

Alpha’s Ben James, Head of Lender Engagement says, “Lenders are looking at myriad factors when setting the LTV, including the fund’s portfolio composition, diversification / concentration, performance, existing leverage levels, realisation certainty and timeframes, to name but a few. Each lender and individual financing circumstance will have its own considerations and sensitivities, meaning lenders structure a financing accordingly to mitigate these idiosyncratic risks. It is crucial to note that no single financing situation is the same, both in terms of the lender’s credit underwrite analysis and the borrower’s purposes for the financing.”

To find out more about Alpha Match, visit www.alphagroup.com/match or email [e-mail]