This case explores E&R Advisors, a multifamily investment management company, as its chief investment officer considers the increasing use by general partners (GPs) of net asset value (NAV) credit facilities to generate distributions to limited partners (LPs). Asset-backed credit facilities were not a novel concept. In the context of private equity (PE) funds, NAV loans allowed funds to borrow against the value of their investment portfolio NAV to finance the incremental capital needs of the funds' portfolio companies. And post-COVID-19 economic conditions led GPs to expand the use of NAV loans. The high-interest-rate environment and associated depressed company valuations pushed GPs to delay investment exits. Delayed exits, in turn, eroded distributions to LPs, which reduced LPs' ability and desire to commit to new funds, which deprived GPs of new dry powder. In this environment, an increasing number of GPs turned to a new strategy: borrowing through a fund's NAV facility to fund distributions to LPs. There were some arguments that this practice distorted actual fund performance and might affect the quality of E&R Advisors' stringent due diligence process, so the chief investment officer needs to better understand the NAV-loan space. What were the core drivers of NAV facilities? The risks? Should E&R Advisors take a closer look at the practice of using NAV loans to generate distributions to LPs?
