A little-known and dangerous financial tool was the subject of heated debate among Wall Street giants at a global conference held by the Milken Institute this week.
Many private equity firms have secretly begun mortgaging their investment funds, piling on leverage. In other words, they are making loans to companies that have already taken out loans to acquire them.
At a time when dealmakers are desperate to raise new capital after the pandemic-era boom, the structure, known as a net asset value loan, is making it possible to raise money overnight.
More PE firms are turning to this tool for their next round of financing, especially those facing hurdles during deal-making downturns. That is, companies that have not yet returned cash to the limited partners they named in the previous round.
“We're under unprecedented pressure from LPs to send cash,” founder Leonard Green's Jonathan Sokoloff said on stage at the Milken conference. “We will send you cash whenever possible.”
A Leonard Green spokesperson said the company had never used any form of NAV loan.
The big debate at Milken was whether private equity firms trying to solve this problem at NAV would buy time with investors by betting on the future.
How NAV loans work. It is offered by banks and some small private credit specialist lenders and is backed by the net asset value of the investments of carefully selected PE firms. Interest rates are higher than other private equity loans, making it attractive to lenders.
According to rating agency S&P Global, there are currently about $150 billion in NAV facilities on the market. Over the next two years, that number is expected to double. Investor liquidity is only one use of loans, and loans are often invested in portfolio companies.
Lenders say they are providing loans with caution. “When we lend to a portfolio, the fund will be in its fourth or fifth year,” Pierre-Antoine de Serency, co-founder of private equity finance firm 17 Capital, told Dealbook. Ta. “We have very good sources of information.”
Lenders and advisors working on NAV loans say that NAV loans are generally structured to minimize risk, have short terms of two to three years, and are a metric that compares the estimated value of the asset to the size of the loan. states that the loan-to-value ratio is low. Loans against diversified assets are safer than loans to individual companies because the risk is spread out. It could also mean better financing terms.
However, the danger lies in using illiquid assets. The private equity business model relies on borrowing money for each of the fund's businesses. However, NAV loans are mostly; group of business. While this spreads the risk, it may effectively use good companies to prop up bad ones, while adding increasingly expensive costs. Leveraging already leveraged funds.
“It brings more risk,” Patricia Lynch, head of law firm Ropes & Gray's securitization practice, told Dealbook.
The quality of these loans depends in part on the private equity firm's ability to accurately calculate the value of the business (often as evaluated by a third-party valuer). When loans go bad, selling those assets is neither quick nor easy.
Limited partners have limited recourse. Many of the contracts with private equity firms were written before NAV loans became fashionable, meaning that these loans could technically, if not explicitly, be granted. It means that there is. However, executives from several large pension funds who spoke to DealBook on condition of anonymity because they are not authorized to comment on behalf of the companies said that PE firms have concerns about using NAV loans for distributions. He said that he had informed him. Some companies, like Neuberger Berman, are taking a cautious approach.
“The general feeling is, why use them?” said Liz Traxler, managing director at Neuberger Berman. “If there was transparency about the usage and it was consistent with the LP, things would probably be very positive.”
While the worst-case scenario of a PE firm defaulting on a NAV loan may be unlikely, it is an untested risk that could harm the very investors the private equity firm is trying to appease in the first place. There is. Ann Marie Fink, chief investment officer of the Wisconsin Investment Commission, said on stage at Milken. I end up losing money with a NAV loan and that's not a good way for me to get my money back. ” — Lauren Hirsch
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TikTok has filed a lawsuit seeking to block the law that would force the sale. The company said recently passed legislation (requiring the app to be separated from Chinese owner ByteDance or face a ban) is in place because millions of Americans share their views. The lawsuit alleges that the app violates the First Amendment by effectively disabling the app for use in the United States. At the heart of the case is the intent of lawmakers to protect the country from what they and some experts say is a national security threat.
FTX said it plans to repay all customers. The repayment amount will be calculated based on the amount of debt plus interest as of November 2022, when the virtual currency exchange filed for bankruptcy. Customers will no longer benefit from any significant increase in cryptocurrency prices thereafter.
Further drama unfolded over the contract with Paramount. Dealbook's Lauren Hirsch and The New York Times' Ben Mullin report that Sony Pictures Entertainment and Apollo Global Management plan to break up their media empire if they succeed in a $26 billion takeover that has expressed interest. Ta. In other potential breakup news, T-Mobile and Verizon are said to be in talks to break up US Cellular, according to the Wall Street Journal.
US authorities are reportedly investigating Tesla's claims about the Autopilot feature. A federal prosecutor's investigation has accused Elon Musk's electric car maker of securities fraud and wire fraud by implying its cars could drive themselves, even though the systems required human oversight, Reuters reported. The focus is on whether he committed the crime. That may again raise the question, “Is it a scam or arrogance?”
“Fun Flation” Taylor Version
Europe is finally getting on board with Taylor Swift's record-breaking Elas tour, and it looks like it's also reaping the financial benefits that come with it.
The billion-dollar tour began in Europe on Thursday at the 40,000-seat La Défense Arena in Paris, and continued through August to Stockholm, London, Amsterdam and other major cities.
Swift's show appears to have inspired tourists to visit Europe. Americans who missed out on home games last summer are taking advantage of a strong dollar, with ticket prices cheaper on the other side of the Atlantic.
Airbnb rentals are on the rise in cities where concerts are held. Airbtics, which tracks Airbnb rental data, found a sharp increase in bookings for some European destinations on Eras tours. In Paris, rental occupancy rates rose to nearly 100% on Thursday from 73% a week earlier. Airbtics said a similar pattern was seen in Milan, Munich, Vienna and Warsaw. According to Airbnb, once European tickets go on sale in July, the number of searches for Airbnb rentals in London, Edinburgh, Cardiff and Liverpool during the concert period will increase compared to searches for these dates in the previous month. That's an average increase of 337% on the night.
Some economists expect the Elas Tour to be the first boost of a busy European summer of events. The trend will continue in Europe in 2024, says Berenberg economist Holger Schmieding, who coined the term “fan inflation” to describe consumers scattering despite high inflation last year. I predict that I will be deaf. Swift's tour is one of several major events to take place on the European continent. This includes the UEFA European Football Championship, which begins next month in Germany, and the Summer Olympics, which begin in Paris in July.
European households may have even more spending power than they did last year. Food and fuel inflation is easing faster than in the US, and interest rates could start falling as early as next month. “We're going to see even more significant increases in consumer purchasing power in Europe this summer,” Schmieding told DealBook.
What the NFT boom (and bust) tells us about the dark side of the art market
Remember NFTs? For a brief period during the pandemic, non-fungible tokens made countless headlines and generated billions of dollars in sales. Now, while other crypto assets are soaring, the market has dwindled to just a few million dollars, and former President Donald Trump is using NFTs to raise campaign funds. But the boom has illuminated a dark side of the art market and economy, writes Times reporter Zachary Small in “Token Supremacy: The Art of Finance, the Finance of Art, and the 2022 Crypto Crash.” There is. DealBook spoke with Small about his upcoming book.
What has the advent of NFTs revealed about the art market?
They shed light on the speculation and laundering that is constantly happening in the art market. NFT sales are recorded through the blockchain, so you can see price changes in real time and speculate about what's going on. Someone had set up two wallets under different signatures and was trading back and forth to inflate the price of the work, until an unsuspecting Rube realized that the work was doing well. There were a lot of wash transactions until I decided to buy it. Some experts and analysts say it ended up accounting for a significant portion of the market.
So should the art market be regulated like the stock market?
The art market is often described as the world's largest unregulated market. There are paintings that sell for hundreds of millions of dollars. However, since the Bank Secrecy Act does not apply, it is very easy to use a shell company. The buyer does not know the seller. The oligarchy has been successful in using art advisors as pawns to mobilize funds. But federal regulators say the art market doesn't seem serious and has a fundamental problem. How do you price art? Who cares? It's a champagne problem for billionaires.
NFTs have taken a very similar approach. This is a genius approach to making things look ridiculous so that regulators don't really need to intervene. According to my report, this is a very deliberate strategy on the part of companies and investors to avoid regulation, and it's working.
What does the NFT boom tell us about the future?
The most urgent thing for me is that if you want to know how 20- and 30-year-olds think about the economy, you need to know what they were doing in the world of NFTs and cryptocurrencies. That's it. I think this acceptance of volatility and speculation is creating a system where speculation and volatility are more acceptable because we've all experienced interest rate fluctuations and inflation and all the other economic red flags. This makes it difficult for regulators to protect the system.
thank you for reading! See you on Monday.
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