On July 25, the Institutional Limited Partners Association (ILPA) released its 2024 guidance on NAV-based facilities, offering recommendations for limited partners and general partners. The report details the current use of NAV facilities and points of friction between stakeholders. It highlights the steps needed to enhance transparency and address key legal considerations.

Key Highlights:

• Increased Use and Transparency Needs: The Fund Finance Association (FFA) estimates that the market for NAV-based facilities, currently valued at $100 billion, could grow to $600 billion by 2030. These facilities provide additional liquidity to manage indebtedness, support interim investor liquidity, and fund portfolio growth. The report covers the structure and recourse options for these facilities, the roles of lenders and rating agencies, and various use cases including portfolio support and early distributions.
• LP Concerns: LPs often have limited insight into the use of NAV-based facilities and struggle with a lack of governance, as GPs may not always communicate their use proactively. Some GPs view traditional leverage provisions as sufficient authority for NAV financing, which may not always align with LP expectations. LPs are also concerned about the impact of early distributions facilitated by NAV-based facilities, which can distort performance figures. The report also provides an in-depth analysis for early distributions and the use of NAV financing in existing portfolios.
• Recommendations for Transparency and Engagement: ILPA advises GPs to seek LPAC consent before implementing a NAV-based facility unless explicitly permitted by the LPA. This includes detailed disclosures on the facility’s rationale, size, structure, key economic terms, and potential conflicts of interest. ILPA also recommends that GPs engage LPs about the facility's use and its impact on the portfolio and distributions​.
• Proposed Legal Documentation: The report suggests clear definitions and limits for NAV-based facilities in new LPAs. This should encompass borrowing limits and detailed reporting requirements to enhance transparency. The guidance also includes recommendations on the treatment of NAV facilities in both older and newer LPAs. ILPA recommends that LPs proactively discuss NAV-based facilities with their GPs to ensure fund documents adequately address these structures​.

For further information please contact Nicholas Smith ([email protected])