NAV Financing Case Study

Hi Monkeys,

I have a 2-day take-home case study coming up with a PC firm for their NAV Financing business.

I think it will likely be a NAV loan to a single PE fund, so I assume it will asset-level LBOs leading to a Fund NAV loan waterfall. What type of credit analyses should I add in to make me stand out / anything else to consider? 

What type of sensitivities do you think I should add in?

Thank you!

2 Comments
 

Based on the most helpful WSO content, here are some insights for your NAV Financing case study:

Credit Analyses to Include:

  1. Asset-Level LBO Analysis:

    • Evaluate the leverage, growth, and profitability of the underlying assets.
    • Assess the free cash flows and their predictability.
    • Consider the purchase multiples and exit strategies.
  2. Fund NAV Loan Waterfall:

    • Analyze the distribution of returns and the impact of different scenarios on the waterfall structure.
    • Consider the implications of different financing instruments (e.g., PIK, equity syndication).
  3. Industry and Company Operations:

    • Use Porter's Five Forces to evaluate industry dynamics.
    • Assess the company's operational metrics such as price/volume growth, cost structure, and ROIC.
  4. Financial Health and Strategic Initiatives:

    • Review the company's financial statements, focusing on capex, working capital, and projected financials.
    • Evaluate any strategic initiatives, such as non-core business lines or potential asset disposals.

Sensitivities to Add:

  1. Purchase Price:

    • Run scenarios with varying purchase prices to see the impact on IRR and overall returns.
  2. Exit Cap Rate:

    • Analyze how changes in the exit cap rate affect the valuation and returns.
  3. Rent Growth and Market Rents:

    • Consider different growth rates for rents and market conditions.
  4. Hold Period:

    • Evaluate the impact of different hold periods on the investment's performance.
  5. Waterfall Structure:

    • Modify the waterfall structure to protect downside risk and assess the trade-offs in upside potential.
  6. Refinancing Scenarios:

    • Include scenarios where the fund refinances mid-hold to see the impact on NOI and overall returns.
  7. Interest Rate Sensitivity:

    • Assess how changes in interest rates (e.g., LIBOR) affect the cost of capital and returns.
  8. Credit Risk:

    • Evaluate the credit risk associated with the sponsor's underlying equity strategy and its impact on the loan.

Additional Considerations:

  • Unit Economics: For specific industries, model unit economics to understand the progression of costs and revenues.
  • SWOT Analysis: Conduct a SWOT analysis to identify strengths, weaknesses, opportunities, and threats.
  • Management Incentive Plan (MIP): Propose a reasonable MIP that aligns management's interests with those of the investors.

By incorporating these elements, you can create a comprehensive and standout case study for your NAV Financing business. Good luck!

Sources: Sensitivities......, Private Credit Resources and Prep, Creating own LBO assumptions, Credit Fund to PE: Is it Doable, Private Equity Recruiting Process (From Banking)

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