Buyout groups raise debt against portfolios to return cash as dealmaking slows

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Private equity fund managers are borrowing against asset portfolios to return cash to investors as they struggle to exit investments, adding another layer of debt to the loans financing their corporate buyouts.

Firms are increasingly resorting to the technique, called net asset value financing, because rising debt costs and concern over the economy are making it difficult for them to sell or list the companies they own.

Texas-based Vista Equity Partners and Sweden’s Nordic Capital have used NAV financing this year, while groups such as Carlyle, Hg Capital and SoftBank have previously turned to the mechanism to return cash to investors.

NAV financing is perceived as less risky than lending to a single company. It is also cheaper for the borrower, according to private equity executives.

But some analysts have voiced concerns that such borrowing heaps extra debt on buyout portfolio companies that are already grappling with higher borrowing costs and a weakening economic outlook.

“These aren’t universally a good thing to adopt, you have to look at the overall leverage across the portfolio,” said Magnus Goodlad, a partner at advisory firm Rede Partners.

He added that NAV financing had provided “an alternative means to introduce liquidity” at a time when “all M&A metrics are down and exit activity is dramatically reduced [and] refinancing at the individual asset’s level is more expensive and difficult”.

Goodlad said that overall NAV financing activity was on track to surpass its 2022 total, estimated by Rede to be $21bn.

By contrast, as of mid-June, buyout groups had raised less than $37.7bn through listing portfolio companies globally, PitchBook data shows, on course to be the lowest amount in a decade.

Sales to corporate buyers and other private equity are also on course to fall to their lowest level in a decade, the data shows.

Firms typically seek to return cash to investors as they gear up for a new cycle of fundraising.

Vista Equity Partners, which is seeking to raise as much as $20bn for its latest flagship fund, has tapped Goldman Sachs to arrange a $1.5bn loan secured against its portfolio companies. This was used in part to repay its backers earlier this year, according to people with knowledge of the loan. Goldman declined to comment on the Vista loan.

Nordic Capital is also in talks to raise a loan secured against some of its investments, according to people familiar with the matter, with one saying the Stockholm group could raise as much as €600mn.

Nordic Capital and Vista declined to comment.

Ted Goldthorpe, head of the credit unit at BC Partners, which provides NAV financing loans, cautioned that investors in PE funds “can be very sensitive to leverage”.

Joana Rocha Scaff, head of European private equity at Neuberger Berman, also said that, while such techniques “can have some useful benefits, they add incremental financial risk to the fund”.

In a notable transaction last year, Goldman Sachs and Carlyle’s internal capital markets unit helped arrange a loan exceeding €1bn for Carlyle late last year, securing it against assets in the US firm’s fifth European buyout fund, according to two people with knowledge of the borrowing. The loan was used to send money back to Limited Partners. Carlyle declined to comment.

London-based Hg Capital, Europe’s largest software investor, has raised at least £500mn via NAV loans to help finance payouts and continues to view it as a useful tool, according to people close to the firm.

In late 2021, SoftBank, the Japanese investment group, borrowed more than $4bn from lenders led by Apollo against companies in its Vision Fund 2, to return money to itself as the fund’s largest investor.

SoftBank then used the money for new investments. The loan was taken out at a 5 per cent fixed rate and secured against assets worth nearly $50bn.

The value of the assets in VF2 has since decreased, without SoftBank coming close to defaulting, according to a person familiar with the matter. SoftBank did not respond to a request for comment.

The terms of recent loans viewed by the Financial Times showed that borrowers have agreed to pay at least 7 percentage points above benchmark rates and normally ask for payment-in-kind features that give them the option of paying interest with resources other than cash.

At current rates, NAV borrowing costs are at a minimum of 10 per cent in the US and Europe and can reach as high as 20 per cent or 30 per cent, according to market sources.

Many such loans have floating interest rates, which means their costs — while still less than other financing routes — will have increased “enormously” as base rates have risen, hurting fund returns, said Grant Cosby, head of fund solutions at Investec.

While they can be a useful tool, they “don’t take the exit pressure off”, Cosby added.