In a single or multi-asset GP-led transaction, investors want to see a credible path towards value creation in the medium/long term, along with good alignment of interests between the fund manager and the companies’ management team. of the underlying portfolio, in addition to a reasonable entry valuation. “The more of his own money a fund manager puts at risk along with the LPs, the stronger the positive signal sent to the investor base. “Fund managers contribute significant amounts of their own capital – often 5% or more – to GP-led transactions, which is considered a strong indicator of conviction and incentive alignment,” he comments. Ignacio ResustaInvestment Specialist Private Markets Iberia de UBS AM.
NAV LOANS, LEVERAGE AND INCREASED RISKS
Another option to increase liquidity in an environment of low divestments are NAV loans, which allow managers to use their investments as collateral. In this way, managers can advance distributions to their LPs or continue contributing to the companies’ growth without requesting additional disbursements from investors.
These loans offer several advantages, such as “maintaining ownership of assets, avoiding forced sales, and providing flexibility in portfolio management.” However, they also carry risks, such as leverage, interest costs and possible valuation fluctuations,” says Resusta. And he assures that, with these loans, it is “crucial to understand the logic behind their use by GPs. Additionally, it is important to note that as an LP, you may find yourself in a subordinate position, as the loan provider has priority.”
Although these loans can be structured in a very flexible way and allow investors’ participation not to be diluted in the face of capital increases, Arcano also considers that these structures can add additional risk to a fund with companies that, in themselves, have leverage: “If the value of the fund’s portfolio declines, the fund may have difficulty repaying the loan. Everything will depend on the specific circumstances and objectives of each manager and the strength of the assets in the portfolio. In any case, they are not an instrument that is very established in Spain yet. At a regulatory level, there are very defined limits regarding the debt levels of the funds,” says Cristina Moreno (Arcano Partners).
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