Assessing ‘Bad Acts' Risk In NAV Facilities (Part 1 Of 2)

One aspect of NAV loans that lenders often focus on is the risk of "bad acts" by a borrower with respect to the investments that underpin the loans. For our purposes, NAV loans are loans to alternative investment entities (e.g., private equity funds, secondaries funds, hedge funds, funds of hedge funds, pension funds and family office vehicles) that are underwritten, either on a secured or unsecured basis, by the value of the entity's investments. When entering into NAV loans, lenders assess the investments owned by the borrowers at closing and then continue to monitor such investments after closing for compliance with financial covenants and other loan requirements. Unlike other types of securities financings (think prime brokerage, securities lending and repo, or typical bank margin loans), where a lender or a third-party custodian on behalf of the lender holds or controls the securities on which the loans are underwritten, the underwritten assets in NAV loans are