The use of NAV financing in private investment funds is becoming more common and is getting more attention from the media, regulators, and investors. Recently, the Institutional Limited Partners Association (ILPA) provided new guidelines to address this trend.
Approval Required: If a fund’s agreement doesn’t mention NAV financing, fund managers (GPs) need to get approval from the LP advisory committee (LPAC) before using it. Even if the agreement allows NAV financing, GPs should still get LPAC approval if they plan to use it for distributing money to investors.
Conflict Management: Any potential conflicts of interest related to NAV financing should be reviewed by the LPAC.
Clear Rules for Future Funds: Future fund agreements should clearly outline how NAV financing can be used.
Check Existing Funds: For funds where the agreement doesn’t mention NAV financing, LPs should ask GPs if they’re using it and if it’s allowed under the fund’s existing rules.
Standard Disclosures: GPs should provide LPs with clear and consistent information about any NAV financing they use.
Liquid LP on the ILPA’s New Regulations
Liquid LP aligns strongly with ILPA issues and is relevant for LPs seeking NAV financing to address liquidity needs. When LPs receive clear information about their rights to pledge their positions as collateral, they are more likely to value their investments and maintain their positions long-term, rather than selling at arbitrary intervals.
Allowing LPs to use their positions as collateral for borrowing offers several benefits:
1. Enhanced Liquidity: LPs can access cash without selling their stakes, which makes the fund more attractive to investors.
2. Tax Deferral: Borrowing avoids triggering capital gains taxes, unlike selling.
3. Reduced Redemption Pressure: It helps maintain stable capital in the fund while providing LPs with financial flexibility.
Learn more about Liquid LP by contacting us.