“Bloomberg: Lenders Entice Private Equity With Crisis Cash at 15% Rates” By Miles Weiss featuring Rich Siegel
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By Miles Weiss
(Bloomberg) — The economic fallout from the coronavirus pandemic is creating sharp demand for loans to private equity funds at interest rates as high as 15%, according to firms that arrange the deals.
Specialty money managers including Crestline Management and Origami Capital Partners have been raising money to make the loans to buyout funds whose portfolio companies may be struggling because of the crisis, regulatory filings show. Loan providers Standard Chartered Plc, Aberdeen Standard Investments and Investec Plc are seeing inquiries surge.
“It’s expensive money, but the private equity funds are in such dire need of liquidity that they are taking it,” said Zac Barnett, co-founder of Fund Finance Partners, a Chicago-based firm that helps money managers arrange financing. Such loans “remain a value proposition” for the buyout firms because they expect their rates of return to exceed the rates on the debt.
The borrowings are known as NAV loans because they’re secured by the net value of a fund’s assets. Some managers need financing to salvage holdings whose sales have plummeted as the health crisis shuttered businesses and kept consumers homebound. Others want the cash to accelerate payouts to their investors or to buy assets at distressed prices.
Most private equity funds already have subscription credit lines enabling
them to borrow at low rates against the capital commitments from their investors. That’s not an option for many of the funds that started from 2013 to 2015 and have since called most or all of their capital.
“We are seeing increased interest from managers with funds nearing the end of their life cycle,” said Kevin Alexander, partner in alternative credit at Ares Management Corp.
The lenders interviewed for this story declined to identify borrowers. NAV transactions are seldom made public, as managers shy from the stigma of paying high rates.
Credit funds, including those started to take advantage of the havoc wreaked by the pandemic, may also be seeking to allocate capital to NAV lending.
Elm Park Capital Management, whose funds normally lend to lower middle market companies, completed its first NAV loan last week, according to Ryan Mullins, a principal at the Dallas-based money manager.
Here’s how the NAV loans often work. A company owned by a private equity fund hits trouble and needs to refinance its debt. Instead of having that company borrow at even higher rates, the fund takes a loan against some or all of its holdings and allots the cash to the one that needs it.
Many banks have pulled back from making NAV loans, giving an opening to specialty funds charging 10% to 15% interest. The steeper rates are due in part to their higher capital costs.
“With debt markets closed, if you have no more dry powder, this is going to be the cheapest alternative for a fund to access additional capital,” according to Richard Siegel, a director in the capital solutions group at Sixpoint Partners, a New York-based investment bank that caters to middle-market private equity firms.
Standard Chartered Bank, which continues to make NAV loans, has seen interest for such financing jump five-fold since March, according to Vicky Du, head of fund finance.
While most NAV loans have traditionally gone to funds with assets of $100 million to $750 million, specialty lenders are getting requests from those with as much as $5 billion, said Tom Glover, head of North America NAV and Strategic GP Finance at Investec. That means the loan requests are bigger as well as more plentiful.
Inquiries on loans of $100 million or more have increased by “orders of magnitude” since the pandemic started, said Doug Cruikshank, head of NAV lender Hark Capital, a unit of Aberdeen Standard. Previously, the firm’s NAV loans ranged from $10 million to $50 million.
Deals “are reaching a size requiring two or more lenders,” said Investec’s Glover.
Though NAV loan requests have outstripped available capital, that could change.
Crestline, an NAV lender based in Fort Worth, Texas, last month began raising as much as $1 billion for the Crestline Portfolio Financing Fund II. Chicago-based Origami completed raising $521 million for Origami
Opportunities Fund IV in late March, said partner Jeffrey Young.
–With assistance from Kelsey Butler.
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