Private Equity Finds Yet Another Way to Keep the Money Coming In

Private equity’s recent splurge of piling ever more debt onto already highly leveraged bets has sparked fears about financial-system risks. Banks, however, are positioning themselves to take advantage.

As buyout firms have struggled to sell companies in a difficult M&A market, many have turned to “net asset value” loans, where they borrow money from specialist funds or banks secured against a portfolio of their holdings — often at very high interest rates. It’s been a controversial way to avoid booking losses on asset sales while hoping for a better environment for making deals.

Now, a corner of the banking industry is being tapped to help finance funds that do NAV lending, a sign of the growing maturity of this type of financial engineering. Banks such as Nomura Holdings Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among a group of lenders willing to offer so-called fund-level or portfolio finance, according to people familiar with the matter. Barings, an asset manager, is also active, the same people say.

Spokespeople at the banks and for Barings declined to comment.

NAV-fund owners have offered up everything from single loans in their holdings to entire portfolios as collateral to secure financing, according to market participants, partially adding another layer of leverage to an increasingly popular pocket of the $8.2 trillion buyout industry. They can borrow from an individual bank or syndicate of lenders.

“Fund financings are varied and can come in many different guises,” says Richard Fletcher, a partner at law firm Macfarlanes. “We’re able to make the structures bespoke.”

Some investors in private equity, and even some firms themselves, have complained that NAV lending is a form of financial engineering that can delay losses and encourage buyout groups to forget their core mission to improve companies. Regulators worry about unconstrained leverage creating systemic dangers. NAV lenders sometimes charge interest rates in the mid to high teens.

But for industry advisers, the expansion of the NAV financing ecosystem is explained in part by lenders not wanting to force buyout firms, with whom they have ties, to sell assets at the wrong time. Borrowers use the money to spend on their companies, or even to buy businesses, and sometimes to make payouts to their investors, known as limited partners.

“NAV is here to stay,” Fletcher says. “Especially where banks are concerned, there’s a significant amount of relationship involved in these fund-level deals. No one wants to be enforcing in this world.”