YouSaid · the spoken record

Anna Marshall

lines on the record: 20
first: 2023-10-14
most recent: 2023-10-14
sittings or episodes: 1
sources: podcast

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“No matter how you look at it, nav loans are a late cycle response to the higher cost of debt and slowing fund flows that will bring uncompensated risk to LPs. Whenever a GP takes a nav loan, LPs must assess whether the additional debt is a wise capital allocation decision or an early warning sign of problems at the firm. Anna suggested that anyone hearing about a navloan should shout out a warning from the mountaintop. She is right. You've now heard my call. Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list, and sign up for premium content. Have a good one and see you next time.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“In many ways, navlones resemble the AAA tranches of subprime CDOs fifteen years ago. Real estate prices across the US had never previously declined simultaneously, and the super senior portion of securitizations held the same credit rating as US treasuries. Between portfolio company debt, Navloans and credit facilities potentially three layers of leverage sit above private equity assets. I can't think of a reason why private equity owned businesses would default on low LTV portfolio loans, but markets experience hundred year floods far more often than once a century.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“This isn't the first structural innovation in finance, and most have unintended consequences. In private equity, subscription lines started as a redheaded stepchild, became an expected business practice, and then led to instances of abuse, including excessive leverage, inflated IRRs, and opacity. Continuation funds started as an idea for GPs to hold great businesses longer and LPs to save fees from fewer sponsored to sponsored transactions. The pristine concept didn't last long. Continuation funds are controversial today. Many LPs are concerned about valuation challenges, incentive misalignment, questionable business selection, and zombie fund extensions.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Other use cases of navlones are more pernicious. A GP struggling to maintain its business might take out a navlone to make a distribution, thinking that LPs will return the money with a new commitment. The GP boosts its IRR but lowers its multiple of invested capital in exchange. Worse, GPs out of dry powder can take Navloans to conduct additional deals. Both of these pit the interest of the GP against those of its LPs. We've seen this before, let's not again. six hundred forty five firms have not raised a new vehicle since two thousand fifteen. With interest rates higher and the fundraising environment tighter, credit is scarce. Navloans feel like they extend and pretend activity we saw After the Gobel financial crisis, for every vista Navlone there were probably ten used to cure the woes of a GP.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“In the second story about portfolio management, I scratch my head again thinking about why this innovation is taking hold now. Private equity firms could have accessed cheaper debt in this way any time in the past, and it's unlikely the entire industry left easy money on the table. The massive growth of private equity over the last fifteen years coincided with low rates and readily available financing. Maybe now is the first time in the modern era that the Titans of industry need to sharpen their pencils.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Canary while both stories have some merit, they also have flaws. In the first story about funding gaps, the late stage of an economic cycle is a bad time to decide the previously undercapitalized deals can be improved with more leverage. Lightly leveraged loans may not have much risk, but as Buffett says, what the wise man does in the beginning, the fool does in the end. I've already seen presentations from lenders offering nav loans for up to fifty percent of a private equity portfolio value. That amount of leverage poses a substantial risk in a downturn.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Capitalizing businesses fund by fund instead of deal by deal resembles a holding company in which the sponsor can efficiently acquire and allocate financing. It's a bit like Warren Buffett's centralized capital allocation at Berkshire Hathaway. With long track records of low losses at the portfolio level may be also sponsors would generate higher returns by exchanging cross collateralization for a lower cost of capital.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Further, the structure of every navlone is different, only clear communication in advance by the GP can help ease LP scrutiny. Canary or gold mine I can tell two stories that suggest that navlones are a win win win for investors, fund managers, and creditors. The first is when incremental leverage carries little risk, creates a better capital structure, and the loan fills a funding gap between lender and sponsor expectations. This dynamic could have played out in the software industry over the last decade. Buyouts worked, but they have not been leveraged byout. This does Navloan exemplifies this story. The second story is that a Navlone is a new portfolio management tool for a mature portfolio, where the sponsor can replace higher cost debt in a more difficult borrowing environment.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Five zero sum game The LPs providing capital to private equity funds are the same ones who invest in private credit funds making NAV loans. One investor's attractive return on a nav loan is another's price paid in a private equity fund. In the case where an LP invests in a NAV lending fund that extends a loan to one of their private equity funds, that investor loses by the fees it pays to both sides. Just like Jack Bogle's critique of active management and public equities. six. Complexity and communications Private equity managers have the discretion to manage the capital structure of their portfolio companies. In a high performing fund, the GP is likely to communicate the rationale for a navloon in advance. In an act of desperation, the LP may not know about the loan until it's too late.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Dividend recap of a private equity portfolio seems like a gimmick to juice distributions and IRR, so the GP can ask for a commitment to its next fund. In fact, NAV lenders are pitching this concept to GPs as part of the value proposition for accepting a loan. Borrowing to do more deals is the ultimate misalignment of interest. If a GP is out of dry powder and unable to raise money, the market has told that GP that it's not supportive of their future deal making ability. Their response of using more debt to reload is like pulling the goalie at the end of a hockey game or throwing a hail Mary at the end of a football game. It rarely reverses the outcome.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Carrying a similar six times leverage. Private equity managers believe that growing future cash flows will justify higher valuations, but lenders have not been willing to extend a proportional amount of debt. If the sponsors are right and their portfolio companies can handle the debt, everyone wins. If the lenders are right and the businesses can't support more debt through a cycle, problems will surface. Only one of the participants will be correct. three. Expensive dividend recap Why does a sponsor think that borrowing at twelve percent to return capital will help an LP whose cost of capital is eight to ten percent? If an LP wanted liquidity from its private equity portfolio, most could borrow against their interests more cheaply than a single private equity fund could.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“one Navlones introduce equity risk a portfolio of options is more valuable than an option on a portfolio. One of the attractive features of private equity is the absence of cross collateralization of debt across portfolio companies. Navloans take away that benefit. The risk of a low LTV Navloan to LPs is low until it isn't. two. Leveraged capital structures Navloans allow GPs to apply more leverage to an individual company than lenders deem appropriate. Creditors and sponsors have not seen eye to eye on the future cash flows of buyouts for a while. A deal back then might have transacted a ten times EBITDA with six times leverage. Today, the same deal might sell for eighteen times.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Deal making GPs out of dry powder can buy time for the fundraising environment to improve by taking a navlone and using the proceeds to add a deal or two to its existing fund. Problems with navloons the LP's perspective While private credit managers are enthusiastically offering navloans and private equity firms are increasingly accepting them, investors in private equity funds are concerned about the risk and misalignment of interest they create.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Refinancing portfolio companies The purse strings of private lenders are tightening. If a private equity firm cannot access funding for its companies, a navloon can fill the funding gap. three. Return of capital As deal making has slowed, some GPs are using the proceeds from Navloans to return capital to LPs. The Act is especially useful when LPs are overallocated to private equity and need distributions to create capacity for future commitments. Carlisle, HG Capital, and Softbank reportedly use Navloans to distribute capital this year.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“A transaction in advance of a debt maturity. In past cycles, Vista would have had to choose among the first three options. Use cases for navlons. The private equity manager's perspective. Private equity managers use Nav loans for refinancing in a tougher environment, distributing capital to its investors, or buying time to continue doing deals. 1. Lower cost debt By providing a diversified portfolio as collateral, sponsors can access cheaper credit for their companies. Business cash flow projections based on the prior interest rate regime may not hold up in the current environment, but a twelve to fourteen percent nav loan allows the model to work if the company exceeds its cost of capital.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Has me thinking about the choices Vista faced in refinancing Fenastrous debt. 1. Provide more capital. Vista could have added a billion dollars of equity, structured equity, or credit from their different pools of capital. two. Pay more interest. Vista could have accepted a higher coupon to refinance Finastra's junior debt. Credit may not have been available at the rates vista liked, but it still could have refinanced and maintained the independence of collateral. three. Waiting for market conditions to improve. Vista could have waited to see if the recent spike in interest rates settled down before testing the market. And four, take a navloan. Vista could have used the lowest cost of capital available. By choosing a navloon to fund Finastra, Vista decided not to add equity to the deal. It estewed traditional junior defining”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Allocators are raising alarm bells over navlones. In her soon to be released book The Climb to Investment Excellence, Anna Marshall, a chief investment officer at the Hewlett Foundation, compares investing to climbing a mountain. At Capitol Allocators University, she called Navlones an oxygen tank for GPs, implying that those accepting Navlones might be running out of air. The different perspectives across the food chain of capital are an interesting dynamic to unpack. Case study Vista and Fenastra In a recently publicized Navloan transaction, Vista equity partners took a one billion dollars Navloan to complete a five billion dollar refinancing for portfolio company Finastra. According to investors familiar with the situation, assets and is performing extremely well.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Differs from the standard practice of borrowing only at the individual company level. Private credit managers see Navloans as the latest gold mine. Accustomed to providing leverage to individual companies, lenders can now issue twelve to fourteen percent senior paper at ten to twenty percent LTV backed by a diversified portfolio of companies. The risk of these navloans seems minimal and the rewards are outstanding. Private equity managers look at navloans as a solution to problems created by today's difficult environment. For those struggling, navloans may help generate distributions to LPs or provide capital for new deals.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Financial market participants tend to stretch at the end of a cycle in ways that look silly in retrospect. In two thousand, public companies with millions of clicks and minimal revenue held market caps in the billions of dollars. In two thousand eight, structured products that sliced and diced subprime mortgages professed to spin junk credit straw into AAA gold. After their respective fall from grace, dot coms became dot bombs, and the only sighting of precious metals attached to defaulted mortgages was on the silver screen. The new thing in private lending is navloans. The portfolio loan”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source
“Nav loans are the latest development in private equity. Private credit managers see NAV loans as a gold mine. Private equity managers are testing the waters, and LPs whose capital is at risk are on the lookout for trouble. I've been thinking about nav loans and what they might mean for private equity participants. It led to this what Ted's thinking. Nav loans, canary or the gold mine.”
2023-10-14 · Capital Allocators · WTT - NAV Loans: Canary or the Gold Mine? · IDENTIFIED FROM THE TRANSCRIPT · source