Pemberton assesses European market for NAV strategy

Pemberton hired Tom Doyle to head its new NAV financing strategy in April 2022, as reported. Doyle previously helped to launch 17Capital's credit fund and has a long-standing relationship with Symon Drake-Brockman, managing partner and co-founder of Pemberton. The firm is now looking to build up its NAV financing team with new hires, according to Doyle.

Pemberton has seven existing strategies including NAV lending; it has also recently launched a CLO business and a Risk Sharing strategy. Its expansion into the NAV lending sphere will allow it to leverage strategies in which it works with sponsors, Doyle said.

"What makes Pemberton an attractive firm for this strategy is its institutional platform, the team's deep credit expertise and relationships with PE managers," he said. "All of Pemberton's strategies revolve around a credit platform, so we can have a conversation with managers in any situation in the PE world."

Sponsors have traditionally engaged with Pemberton via its MBO direct lending strategy. "To date, we have looked at the MBO world for PE sponsors, when they first enter into these companies," Doyle said. "But the addition of NAV lending allows us to track these companies through the investment cycle. We can finance the initial asset, followed by the portfolio, through to an exit in eight to nine years – we call it lifecycle financing."

Although the firm has a strong European base, the firm will seek to work with sponsors in both Western Europe and North America. "We are increasingly serving a lot of US PE houses in Europe, so there will be some natural activity due to that," Doyle said.

The instrument used to provide NAV financing will be linked to the individual circumstance of the loan, Doyle said, given that Pemberton looks at things from a risk point of view.

"We're still at early stages and have an origination team, so we are spending a lot of time educating our clients and Pemberton's investor base," he said. Doyle declined to comment on any potential fundraising for the strategy.

A changing market
The firm sees a range of potential scenarios in which GPs and LPs could make use of its NAV financing facilities. "At fund level, it can be used for an additional pool of capital for add-ons in the existing portfolio, typically after the investment period," Doyle said of the potential use cases for GPs. "Sponsors often have to pass up add-on opportunities if they can't finance them. And if the fund holds on to assets for longer, it repays investors some of their invested capital. The most likely use case is a mix of both of these."

Several trends are driving a need for the GP's strategy, Doyle said. Themes driving the European and US markets vary to a certain degree, and one topic that has already hit the US is generational change.

"In the US, you often have an eponymous founder, and in 10-15 years they might want their partners to buy the firm off them and monetise this," he said. "In Europe, it's more about handing it on, but I expect that we will see more of these opportunities. Although some managers can go down the IPO route to monetise, there are many for whom this won't be an option." Market consolidation is also a topic in this context, according to Doyle. "We have not seen significant market consolidation in Europe yet, but managers could potentially use NAV financing for M&A, securing it against their assets."

Although not as developed as in the US, the European private equity market is currently experiencing a flurry of M&A, be it Oaktree's acquisition of a majority stake in fellow NAV lender 17Capital, Carlyle's acquisition of a minority stake in life sciences VC Sofinnova, or CVC's acquisition of secondaries firm Glendower.

IPOs are also on the cards for firms including CVC following the IPO of UK-headquartered multi-strategy manager Bridgepoint in summer 2021, as reported.

Amidst a climate where many partners are seeking to monetise their stakes, NAV financing can provide a solution for those who might otherwise consider a stake sale, according to Doyle. "At management company level, it can be used instead of a GP stake sale – once you have sold your stake, it has gone, but we provide financing against the balance sheet of the sponsor which is debt or debt-like, and doesn't result in the perpetual sale of a stake," he said.

The steadily increasing volume of capital being raised by GPs is also a trend driving the strategy; with each fund generation getting larger, and GPs including Advent International and Apollo raising USD 25bn-plus funds. "At management company level, the big topic is fundraising," he said. "With funds getting exponentially larger, having to put 2% into each fund as a GP commitment is increasingly difficult, especially when they grow exponentially larger."

Use cases for the strategy do not just apply to GPs, however, with LPs also potentially benefitting from using leverage to support the development of their portfolio, Doyle said. "For LPs and asset managers, as an example, we can monetise their co-investments and expand their balance sheet."

Macro picture
Beyond the market trends of consolidation, M&A and generation trend, several macroeconomic factors affecting portfolio companies and sponsors' deal pipeline are also at play and could drive demand for the strategy.

"The pandemic demonstrated how useful this type of lending could be, although it's not a distressed strategy and it hasn't become popular solely due to Covid-19," Doyle said. "Post-investment period financing will be ever more appealing given the mixture of positive and negative developments that we are seeing in the market now."

Doyle outlined the need for financing to capture untapped growth opportunities. "In a positive environment, managers will come across growth opportunities and will need this financing to tap into growth," he said. "But in periods of stress, you can use this to shore up the portfolio, using the ‘portfolio effect' to support one company with financing."

Longer holding periods are likely to be a consequence of some of the current market stress and uncertainty. "Managers might have to hold onto assets for longer to deal with some of the more negative developments," Doyle said. "But people will need to de-risk and will need more money returned, so more dividend recaps will happen."

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