Investec provides ESG-linked NAV facility for Bluewater

Cadwalader Wickersham & Taft provided legal advice for Investec, while Debevoise & Plimpton advised Bluewater.

Bluewater held a final close for Bluewater Energy Fund II in May 2017 on $1.2bn. However, the NAV facility is linked to the GP's debut fund, Bluewater Energy Fund I, which held a final close in May 2013 on $861m, exceeding its $750m target. 

Bluewater invests in companies involved in energy supply and energy transition, focusing on oilfield equipment and services, as well as existing oil and gas reserves. The NAV facility aims to assist the GP with the continued support and expansion of Bluewater I's portfolio.

Portfolio companies in Bluewater Fund I include UK-based Siccar Point Energy, in which Bluewater invested alongside Blackstone in 2014. The fund also backed Norway-based Wellesley Petroleum in 2015.

Asked about how the relationship with Bluewater came about, Michael Zornitta, a consultant in Investec's Fund Solutions team, told Unquote: "Our leveraged finance team had previously provided financing to Bluewater and therefore knew the team well. Our fund financing team had built a relationship with them since inception, and our advisory team have been very involved with them and knew their portfolio well. So in this case it was about having good relationships, as well as a good understanding of the portfolio and the assets."

Zornitta explained that the ESG element of the facility made sense for Bluewater. "Bluewater is an energy investor with a focus on sustainable investments, so they are driving their own ESG mandate. We discussed early on with them how we could overlay ESG into the facility. ESG principles could arguably be applied to almost every facility we do, subject to the GP's preference and ability to monitor and report the targets set.

"NAV facilities usually take around two months to put in place from initial discussions to final payaway, but they can – and sometimes need – to be done much faster."

"In terms of defining the ESG metrics, we work with the manager to see what their own goals are and that the targets of the facility are related to what they want to achieve," Zornitta said. "With Bluewater, we considered aspects such as carbon neutrality, carbon output, their own ESG policies in the portfolio, and a few social factors that are easily measurable – this can involve diversity, as well as having a healthy and safe workforce. Once the targets are set, a pricing benefit is applied based on the degree to which the manager meets the ESG targets."

These cost savings will be ring-fenced to back further ESG initiatives, according to a statement. The NAV framework also allows for additional costs to be implemented over time.

Investec announced in July 2020 that it had provided a €600m ESG-linked facility to Investindustrial in 2020 for Investindustrial Fund VII. However, the firm believes that Bluewater's NAV-based ESG-linked financing facility is the first of its kind in Europe, it said in a statement.

"NAV facilities are becoming a lot more in vogue in the market – we were arguably among the first banks to offer these facilities, and are familiar with the structures and concepts," Zornitta said.

Investec's NAV financing products are a balance sheet offering, Zornitta said, but the firm also regularly syndicates with institutional capital. He did not comment on the size of Bluewater's NAV facility, but said: "In terms of the size we offer, it's usually dependant on the manager's requirements; however, we have done facilities with an loan-to-value of less than 10% and some up to 30%."

While both NAV facilities and GP-led secondaries are both options for liquidity creation and fund management, each offers different advantages and might be appropriate at different times in the lifetime of a fund. "An NAV facility could be an appropriate method to create liquidity to send up to LPs, particularly where value remains in the portfolio for a longer time," said Zornitta. "GP-led secondaries are becoming increasingly common as a form of liquidity in the later years of a fund life. However, NAV facilities are generally a better form of liquidity earlier on, in, say, year five or year six, when you have a lot of assets and there is more runway." However, he noted that both structures can be implemented as part of the same process. "The two solutions are not exclusive; NAV financing can be an important part of a GP-led process to ensure the best deal and capital base for the assets are created."

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