LPs expect continuation funds to be the most utilised tool for generating liquidity
LPs think that continuation funds will likely be the most common method for generating liquidity used by GPs in the coming 12-18 months. The view was more prevalent across North American LPs. Dividend recaps were the next most popular response, especially among respondents from the APAC region.
Embracing NAV financing – increasing acceptance among LPs
Over two-fifths of LPs expressed comfort with the use of NAV finance in the private equity industry. About 36% are happy for GPs to use the facility with exceptions, whilst 7% were content with GPs employing it freely.
While many LPs exhibit unease with NAV financing, we anticipate that enhanced understanding of the strategy will likely foster greater acceptance of it.
Financing add-on acquisitions emerge as the preferred application of NAV financing
We asked LPs for their views on the purposes for which the utilisation of NAV financing by GPs is acceptable. Funding add-on acquisitions was the primary accepted purpose, but LPs also favour its use in accelerating liquidity and optimising fund performance. There was less enthusiasm for using it to bolster the balance sheets of portfolio companies, which was perceived as the least acceptable application.
While LPs recognise the potential benefits of NAV financing, there appears to be some hesitancy among them to fully embrace this approach, even for accelerating liquidity.
Introduction of additional leverage – a primary concern of LPs when considering NAV financing
LPs recognise several factors when considering the implementation of NAV financing, including the infusion of additional leverage into the system, the importance of transparency in performance calculations and the potential for reviving failing portfolio companies.
The introduction of additional leverage was viewed as a key factor overall, with European LPs unanimously citing it as a top consideration. Regional views across the remaining categories were somewhat more diverse. The importance of transparent performance calculations was at the forefront of APAC LPs minds, whilst propping up failing companies was more of a concern for North American LPs than their counterparts elsewhere.