Private Equity Firms Urged to Disclose NAV Loans to Investors: ILPA Guidelines

Private equity firms are facing scrutiny over their use of net-asset-value (NAV) loans to boost returns, with concerns raised about the potential risks and lack of transparency associated with these financial tools. The Institutional Limited Partners Association has issued new guidelines urging firms to inform investors before utilizing NAV loans, especially when using them for distributions.

The debate over NAV loans has intensified as private equity firms seek ways to raise cash during a deal drought that has limited distributions. While some firms argue that NAV loans can provide much-needed liquidity, investors worry about the potential consequences, such as recalls on distributions to repay the loans.

The Teacher Retirement System of Texas, the state’s largest public pension fund, has been vocal in pushing back against the use of NAV loans without investor consent. The fund, which manages over $200 billion in assets, recently decided to reallocate almost $10 billion out of private equity investments due to underwhelming returns.

The trade group’s guidelines recommend that firms seek approval from the limited partner advisory committee for NAV loans, especially when agreements are silent on the issue. Transparency is key, with investors frustrated by the lack of information on costs and risks associated with NAV loans. The guidelines also highlight the need for firms to disclose the rationale for using NAV loans and whether distributions can be recalled.

Overall, the guidelines aim to address concerns about the potential risks and lack of transparency surrounding NAV loans in the private equity industry. Investors are seeking greater clarity and oversight to ensure the long-term stability and success of their investments.