USA Trends and Developments Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
borrowers to direct cash flows from controlled accounts rather than providing for a “full block” on the account in favour of the lender from day one. Guarantees Given the uncertain value of many of the fund assets against which NAV lenders extend credit and the potential difficulty of liquidating such assets, NAV lenders often require entities that are related to the borrower to guarantee the facility. These guarantees can come from affili - ated entities, including general partners, man - agement companies, parent companies, other affiliated funds, and sometimes the individuals that own and control the management company. As the market has become more competitive, many lenders are requiring guarantees from fewer entities, if any, and sometimes agree to limited recourse guarantees tied to bad acts by the sponsor (a “bad boy guarantee”) or certain narrowly defined breaches (for example, in a real estate context, an environmental indemnity or the failure to complete a construction project), or “partial recourse” guarantees that cover only a portion of the amount owing under the NAV facility. Press Coverage of NAV Facilities In the past year, there were a significant number of articles in the US and UK press (including The New York Times, The Wall Street Journal, and the Financial Times) about NAV facilities. The press coverage tended to focus on the follow - ing points: • discussions about transparency in the use of NAV facilities, with suggestions that there be greater disclosure and communication between sponsors and their investors; • analysis of the impact of NAV facilities on fund performance; some commentators have
focused on the use of NAV facilities to finance distributions to investors prior to the sale of assets, thereby increasing the fund’s DPI (Distributions to Paid-In Capital) ratio, a per - formance metric used to measure the cumu - lative distributions paid to investors relative to the capital they have invested; and • conversations about whether and to what extent funds should use NAV loans to lever - age their investments. The ILPA Guidance for NAV Facilities On 25 July 2024, the Institutional Limited Part - ners Association (ILPA) released guidance for fund sponsors and investors on NAV facilities. ILPA’s goal in releasing the guidance was to standardise practices and improve communi - cation between investors and fund sponsors regarding the use of this product. Some of the key points in the guidance were the following: • LP Disclosure: ILPA noted that investors may need more clarity on the use of NAV facilities, the impact of these facilities on fund perfor - mance metrics, and the effect of using NAV facilities to cross-collateralise fund invest - ments. • Transparency and Engagement: ILPA advised fund sponsors to obtain investor advisory committee consent before putting a NAV facility in place unless the fund’s limited partnership agreement (LPA) explicitly permits a NAV facility. ILPA suggests that sponsors should provide detailed disclosures to inves - tors about the facility’s rationale, size, and terms. • Legal Documentation Proposals: ILPA recom - mended that new LPAs explicitly authorise NAV facilities and provide for disclosure to investors of and, where appropriate, require LP consent to these facilities. This includes defining “NAV-based facility” in the LPA and
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