This fall, Latham’s Investment Funds Practice provided guidance on financing options and considerations for funds and portfolio companies in the second installment of the Private Funds Breakfast Series. The quarterly series is designed to unite senior members of leading private capital firms and financial sponsors for networking and market-focused insights.
The discussion, led by partners Benjamin Berman, Pamela Kellet, and Ivana Rouse, shared insights into the current economic and lending climate and discussed a number of considerations when evaluating debt financing arrangements at both the fund and portfolio company level.
Key Takeaways
- Current Economic Climate: The US syndicated lending market reached US$1.4 trillion in the first half of 2024, while private credit is estimated at US$1.8 trillion over the same period with projections to grow to US$2.8 trillion by 2028. In addition, global infrastructure finance activity is expected to exceed US$1.78 trillion for FY24. This is with the backdrop of higher interest rates that have resulted in increased pricing and impacts on cash flows. We estimate that both the syndicated market and private credit will continue to serve the financing needs of borrowers and both can offer certain advantages and disadvantages some of which are discussed in the next bullet.
- Debt Financing Alternatives for Portfolio Companies: When considering whether to use direct lending or broadly syndicated financing alternatives for portfolio companies, understanding the relative importance to the company of a number of factors including speed of execution, covenant flexibility, pricing sensitivity and institutional relationships is critical. Thinking strategically from the outset of the process can increase the likelihood of a smooth initial execution as well as preserve appropriate flexibility for the company through its lifecycle.
- Net Asset Value (NAV) Facilities and Hybrid Facilities: NAV facilities are gaining traction in private capital as they provide flexibility in capital structuring and financing. With the market evolving, it is important to account for potential issues and ensure that the solutions honor both the customary discretion of fund sponsors and the distinctive characteristics of NAV facilities. This includes use of proceeds for NAV financing, different potential collateral structures, and tax considerations. Sponsors should consider the latest guidance from limited partners when putting these facilities in place and the appropriate communication with LPs.
