ILPA's New Guidance on NAV-Based Facilities in Private Equity: Recommendations for Limited Partners and General Partners

Description

On July 25, 2024, ILPA issued guidance providing general parameters for improving transparency, governance, and risk management between limited partners (LPs) and general partners (GPs) around the use of NAV-based facilities as a liquidity and portfolio management tool. This guidance was in response to the increasing prevalence of NAV-based financing facilities in private equity where the facility is structured as an asset-based debt at the fund level.

ILPA broadly defines "NAV-based facilities" as any "credit facilities that are backed by the value of the fund's investments." While ILPA's guidance provides caution in the use of NAV-based facilities, the guidance generally does not oppose the use of NAV-based facilities, and it does not limit permissible use cases. It also does not impose leverage limitations tied to the use of NAV-based financing. Instead, ILPA's guidance is intended to establish a standardized framework to encourage further cooperation between GPs and LPs and ensure their interests are balanced with the objectives of the fund.

The ILPA guidelines address several key concerns of LPs regarding the use of NAV-based facilities including the lack of transparency, governance, and disclosure, inconsistent approaches to how GPs treat NAV-based facilities, and the use of proceeds and expenses relating to NAV facilities to fund early distributions. The guidelines address these concerns by promoting and improving transparency and encouraging LP engagement when a fund is considering NAV-based financing.

Listen as our authoritative panel discusses how ILPA's guidance addresses the key concerns for LPs in the deployment of NAV-based financing facilities and provides practice pointers for advising LPs, GPs, and lenders on implementing these recommendations going forward.