What's Stopping PE Firms From Using NAV Loans Like This?
This could be a stupid question, but I'm asking it anyway.
Say we have an investment firm with two funds: 1.) a main fund with super low-risk credit investments and 2.) a buyout PE fund.
What's stopping this investment firm from getting a NAV loan collateralized by the low-risk fund portfolio, then issuing the funded capital as debt for its PE investments at stupidly generous terms?
The returns generated from magnified leverage on the PE firm investments would flow up to the top and then be used to pay off any difference in the cost of capital from the PE portco loan and the NAV loan.
I see the logic holes.
Or what if the NAV loan could be issued at the parent company level instead of the fund level while still being able to use the low-risk portfolio as collateral, so the NAV loan can be issued at a lower cost (lower potfolio risk) and the fund would not have its performance affected. There would be some sort of agreement in place that would also have the management company guarantee the NAV debt and maintain certain amounts of cash on hand, to hopefully ease LPs.
Del
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