FRANCE Trends and Developments Contributed by: Fernand Arsanios, Delphine Guillotte, Guillaume Chaboureau and Houda Idaroussi, King & Spalding
LP distributions) without selling underlying assets. The weak exit environment in France has put NAV loans squarely in the spotlight precisely because they address the market’s core problem: how to generate returns for investors when assets cannot be readily sold. These facilities bridge timing gaps and preserve upside, preventing value-destructive sales. Fund man- agers integrate NAV credit alongside other liquidity tools, viewing them as essential providers of optional- ity that deliver orderly liquidity instead of forcing dis- tressed, fire-sale exits. Indeed, the number of NAV facilities utilised in French deals has significantly risen in the past 12 months, establishing them as a more common, albeit highly tailored, financing product. Lender appetite for NAV transactions has broadened significantly beyond traditional fund-finance banks in France. Non-bank debt funds and specialist credit managers now actively underwrite NAV deals, driven by a desire for higher returns and a willingness to bear higher risk. Each transaction is highly tailored; eligi- bility criteria, valuation triggers, and leverage tests are calibrated to the specific fund’s portfolio. Spon- sors and lenders collaboratively negotiate bespoke collateral and covenant packages (eg, gradual step- downs on leverage) for predictable behaviour across performance scenarios. NAV financings are treated as negotiated, asset-specific arrangements. This cus- tomisation is crucial for non-bank lenders in France to benefit from exceptions to the French banking monopoly rules, often requiring specific structuring, such as bond issuance, to permit regular lending activities. Robust governance and rigorous valuation discipline are central to NAV documentation in France. Lenders demand explicit valuation methodologies, frequent reporting, and clear remediation triggers. Managers often engage LP advisory committees or independ- ent valuers for distributions, with industry guidance stressing early consultation to foster a collaborative approach. The goal is to align fund governance and LP consent with lender security, ensuring liquidity with- out disputes. French practice adapts NAV structures to local regimes, often using continuation or pledge vehicles to hold the collateral with tailored security packages. Documentation increasingly includes NAV- based testing, step-down provisions, and phased
cure mechanisms for illiquid collateral. Despite these frameworks, NAV financing, though useful, is also perilous. It presents significant risks due to the inher- ently illiquid nature of the underlying collateral, which complicates enforcement and exposes lenders to valuation volatility if asset values decline. Enforce- ment can be severely complicated by multi-layered capital structures and change-of-control provisions at the portfolio company level, potentially diluting NAV lender protection. Furthermore, regulatory approvals may be required for enforcement on strategically sen- sitive infrastructure assets, and lenders are highly sen- sitive to concentration risk, demand risk, commodity risk, and currency risk within the fund’s portfolio. The need for non-bank lenders to navigate French banking monopoly rules through specific structuring (eg, bond issuance) also introduces a layer of legal complexity. NAV financing has proven workable and is rapidly gaining traction in France, with a significant uptick in French NAV deals observed in the past year. This trend is expected to continue as managers and lend- ers refine processes, particularly as managers increas- ingly pair NAV financings with continuation strategies to comprehensively solve the persistent liquidity puz- zle facing the French market in 2025. This adaptive financial landscape highlights the innovative solutions emerging to meet complex private market liquidity demands. Capital in Reserve: Mezzanine and PIK Mid-market sponsors also leaned on subordinated capital to top up financing when senior bank lever- age hit limits. Mezzanine debt (often issued as a pri- vate bond by the sponsor’s holding company) and payment-in-kind (PIK) notes were used to boost total debt capacity and defer cash interest during ramp-up phases. These instruments essentially act as quasi- equity: by structuring interest as PIK (or even PIK tog- gles), sponsors delay cash outflows while still gaining more debt in the structure. Consistent with global practice, French dealmakers built robust protections around these structures. PIK notes were normally at the holding-company level so that operating-company security remained with sen- ior lenders. Intercreditor agreements spelled out strict payment waterfalls and standstill provisions, ensur-
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