Private Equity Firms Debate Risky Financial Tool at Milken Conference

Title: Private Equity Firms Debate Risky Financial Tool at Milken Conference

At the Milken Institute’s Global Conference this week, a controversial financial tool known as net asset value (N.A.V.) loans took center stage, sparking a heated debate among Wall Street titans. This little-known mechanism has been quietly adopted by many private equity firms, allowing them to leverage their investment funds by taking out loans against the businesses they already own.

In the wake of the pandemic boom, dealmakers are scrambling to raise new cash, and N.A.V. loans have emerged as a quick solution. These loans, backed by the net asset value of select P.E. firms’ investments, offer higher interest rates that appeal to lenders. Currently, there is about $150 billion in N.A.V. facilities on the market, a figure expected to double in the next two years.

While some see N.A.V. loans as a necessary tool to meet investor demands for cash returns, others are concerned about the risks involved. The debate at the conference revolved around whether private equity firms are jeopardizing their future by relying on N.A.V. loans to buy time with investors.

Lenders and advisers working with N.A.V. loans emphasize cautious structuring to minimize risks, including short durations and low loan-to-value ratios. However, critics warn that leveraging illiquid assets could pose significant dangers, especially if the loans sour and assets cannot be easily sold.

Limited partners, who have limited recourse in such scenarios, are expressing concerns about the increasing use of N.A.V. loans for distributions. While some firms like Neuberger Berman take a measured approach, others are questioning the necessity of these loans.

The worst-case scenario of P.E. firms defaulting on N.A.V. loans remains a looming risk, potentially harming the very investors they are trying to appease. As the debate continues, the future implications of N.A.V. loans on the private equity landscape remain uncertain.