17 Capital’s Pierre-Antoine de Selancy: Navigating NAV loans | Features

NAV finance, also called portfolio finance, is a fairly recent innovation and is the prerogative of a few specialized banks and managers.

Unlike private credit, which is at the company level, NAV financing is at the level of the private equity fund. The concept is still “relatively young”, as de Selancy puts it; only about 15% of general partners (GP) use it. 17 Capital estimates that the market could reach 700 billion dollars (699 billion euros) by 2030.

Since de Selancy founded it in 2008, 17 Capital has completed 87 transactions worth €9 billion and completed 44 exits with no realized losses. The company recently launched its first credit fund, raising €2.6 billion in April 2022. This comes on top of a €2.9 billion preferred share fundraising in July 2021.

The first years were difficult; de Selancy describes how it took 600 meetings to raise the first €88 million.


PIERRE-ANTOINE DE SELANCY
● 2008-: Founder and managing partner, 17 Capital
● 2003-08: Partner, AGF Private Equity
● 2000-02: Investment Director, Fondinvest Capital
● 1998-2000: Partner, Coller Capital

17 CAPITAL
● Founded in 2008
● Based in London and New York
● Assets under management: 11 billion euros
● Historical: 16% gross IRR and no realized loss
Senior loans in shares and NAV
● Majority stake acquired by Oaktree in 2022

For borrowers, the proposition was simple enough from the start – providing an alternative between the limited supply of low-cost credit only available to the largest private equity managers with broadly diversified portfolios, and secondary market offerings with a high target IRR (internal rate of return) of 25%.

“Between the 4% cash and the 20% cash, there should be someone sitting in the middle offering a more competitive cost than equity and on more flexible terms than debt,” de Selancy says.

NAV financing provides capital in the lifecycle between underwriting loans and secondary transactions, typically to fund business expansion or to provide liquidity to limited partners (LPs) or principals. It is positioned as an alternative to a portfolio sale or an IPO.

Subscription lines of credit, now relatively well established, typically fund cash management for the first five years. Later in the cycle, the secondary market led by general partners (GP) takes place around 10-12 years if the managers want to liquidate a fund, replace the shareholding or leave the initial investors.

NAV financing, usually structured as preferred stock, is backed by the net asset value of the underlying portfolio, so the lender receives first distributions until a minimum return threshold is met.

It typically focuses on years 5-10, when the fund is fully called and the manager wants to either buy in a co-investor or make an equity investment to fund growth, through acquisitions, for example.

Conversations with borrowers tend to involve “two minutes explaining what we do, then the next 58 minutes listening to the private equity manager, trying to figure out what their growth plans are and how our investors’ money can help them.” be useful,” says de Selancy. .

“When we provide financing to the management company, it is often on the basis of the commitment to the funds, sometimes on interest carried. We understand those cash flows quite well and are able to provide financing accordingly. »

Changes in market conditions are beginning to appear. “Dealing volumes are down, but people still need to inject capital into companies for add-ons or buy co-investors who want to sell, which creates huge demand for our product,” says of Selancy.

Turbulent markets also prolong the life cycle of private equity. So, with delayed exits, the middle phase of the business life cycle, where NAV funding comes into play, lasts longer.

For institutional investors, NAV finance offers an attractive alternative to direct lending.

De Selancy sees a better understanding of NAV funding but it has not yet made its way into systematic pension fund allocations. An activity in its own right, it is the prerogative of a few institutional investors.

17 Capital’s current investor base spans Canada, the Netherlands and the UK. Around half of assets under management are pension funds, with the rest coming from insurers and sovereign wealth funds.

Changing expectations

All providers of private capital must be attractive in terms of price to conclude transactions. But to go out and raise money, de Selancy says they also need to focus on what institutional investors are looking for — and can find elsewhere.

“It’s not an easy fundraising environment as institutional investors change their investment policies significantly,” according to de Selancy.

Private credit is now beginning to compete much more directly with liquid credit from institutional investors. As investors begin to see much more attractive returns in the public high-yield market, they see less need to allocate to the private market: “There must be a premium for being private.”

De Selancy continues, “Direct lending funds are currently rolling out aggressively and some of them are not raising their prices much. They will likely face tough times when they come to raise the next fund because they will compete with liquid credit much more than they have in recent years.

This means injecting discipline into deal sourcing. Transactions are already complex in nature and teams are struggling to complete them. For a borrower, going from 9% to 11-12% is a difficult task, even in the current context.

“Now you add another difficulty to it, which is more expensive, but that’s what we have to do if we want to stay in business and be able to raise the next funds. Those are the prices we have to go to in this moment.

Why the deal with Oaktree? De Selancy says, “The main driver was that there are probably over 200 private equity organizations in the United States that we want to work with. We have dealt with 18 so far and we want more to work with us.

The addition of NAV financing, an area that a number of private equity firms and banks are currently exploring given growth forecasts, allows Oaktree to cover more of the private credit waterfront.

The intention is for 17 Capital to leverage the Oaktree network to integrate the NAV financing proposal into its offering – training is currently underway, and what de Selancy describes as “evangelizing” the proposal within the group. But 17 Capital will not be integrated into Oaktree – “we remain very separate in the way we work”.

“Raising a fund for the first time in today’s world is complicated,” says de Selancy. In terms of deal sourcing, 17 Capital will carry out 1,500 meetings per year, will identify 20 situations and will lend in less than 10% of these cases. Technical feasibility, legal issues and taxation can create barriers. As in other areas of private credit, it is a labor-intensive activity.

“Identifying the engine of a transaction, the technical feasibility, is what takes time and it cannot be bought”, concludes de Selancy.

About Thelma Wilt

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