Partner Content: How to keep portfolios fully concentrated and avoid dilution risk

Family offices are likely to be well aware of private equity’s ever-expanding secondary marketplace, providing them with an established exit route to raise liquidity. However, this often means accepting discounts on assets that they may not necessarily want to sell. 

To address this challenge, Alex Branton founded London-based Nodem Capital to provide innovative NAV financing solutions for multi-asset portfolios. As a form of non-dilutive capital, asset owners are able to retain and generate further value in their investments, using cash flows to service the loan. 

Each loan is underwritten against the overall value – or net asset value (NAV) – of the investment portfolio and can be utilised by family offices to support their specific needs in a more time-efficient manner than traditional secondary markets.

Nodem is backed by the family office, Lepercq Group, whose origins began as the American investment branch of Banque Schlumberger in 1936. 

“I’ve known Lepercq Group from my days as a GP on the private equity side. I went to them to say I was creating a new asset manager to expand structured financing solutions to family offices in areas like venture capital that are less well covered. They look for innovative investment strategies with a structural advantage,” Branton tells Family Capital. 

Speed regardless of complexity 

Nodem works with global family offices, GPs and funds to provide a third alternative to secondary market sales and traditional bank lending, where inflexible terms, duration mismatching and strict LTV guardrails limit optionality. 

For family offices that may have complex portfolios comprised of direct investments alongside multi-asset fund investments in GPs, both large and small, Nodem is able to tailor its financing solutions in a way that banks and larger NAV finance managers like 17Capital may be less comfortable pursuing. 

This provides speed of execution and certainty with a typical time-to-money timeframe of six to eight weeks, depending on how complex the portfolio is. 

“We could probably compress that even more in special situations. For example, if a family office is about to default on a capital call, and they’ve got two weeks to get it done, we might be able to structure something quickly on a preferred equity basis as this is more of a covenant light, recourse light facility,” says Branton.

Nodem’s sweet spot is in the $10 to $50 million lending range, operating beneath the radar of the majority of NAV lenders who focus more on large buyouts whose portfolios are relatively simple to underwrite. 

For families wishing to improve portfolio management in a volatile environment, the emergence of bespoke NAV providers represents a key capital pathway.    

If someone needs to borrow $20 million against their $100 million portfolio, option one is to go and sell it for 60 cents on the dollar on the secondary market. 

“Or you can come to us and get preferred equity financing or a NAV loan that allows you to generate liquidity while also retaining upside,” says Branton. 

“That’s the gap we are addressing, where the portfolio is not as far down the fairway and is harder to underwrite. It doesn’t even need to include fund investments, it could be a portfolio with 10 direct stakes.”

The key difference between a NAV loan (debt) and preferred equity is the level of covenant protection. A NAV loan comes with a pledge-like security over the underlying assets and typically has a fixed term maturity of three to five years (occasionally with extensions). Preferred equity tends to be more covenant light where the lender sits senior to the borrower at the time of unwinding the underlying asset(s).   

Where’s the DPI?

In 2023, average discounts to NAV were around 30% to 35% for plain vanilla VC portfolios. 

Things improved last year, with Jefferies noting an average discount of 22% (through June) while some direct transactions achieved a small premium. The variable of quality of assets creates wide price dispersion. And as Branton notes, even if someone receives a 20% discount on what is still a growing asset, the potential losses through future upside are potentially far greater. 

It is this duration mismatch that Nodem Capital seeks to bridge. 

“You now have a private market that has grown to around $15 trillion, but liquidity, and the structures around it, just haven’t caught up. Approximately 80% of venture is still unrealised,” says Branton. 

 The lack of distributions highlights one of the main use cases for NAV loans among family offices. In order to keep re-allocating capital to new funds and maintain GP relationships, someone can leverage their older LP stakes to raise liquidity with Nodem, and repay the loan once distributions are paid out. 

A second use case is to use NAV financing to buy back shares in the family’s own operating company, or to provide acquisition financing to underlying operating companies, with Branton noting, “it can be cheaper to leverage a portfolio than a single company”. 

Other use cases might include funding tax obligations, a divorce settlement, bank refinancing, or as a bridging option to fund an accretive investment. In this scenario, the benefit of Payment in Kind (PIK) is that it is a non-cash paying interest facility. Durations are generally up to five years. 

Everything hinges on valuation 

As NAV financing applies at the portfolio level, having an accurate valuation is vital. 

Given the extent of inflated prices and down rounds in recent years, knowing what a venture asset is worth can be challenging; especially if it’s an early-stage investment. The more mature the asset the easier it is to value.    

“If the LP stake is with a big sponsor we take the inputs of the underlying audited NAV from that manager. For direct stakes, we need to get our hands a little dirtier and make our own assessment of NAV. If there are any question marks, either the deal doesn’t happen or we just reduce our loan-to-value,” explains Branton. 

Families deciding whether to utilise non-dilutive capital should weigh up whether the value creation benefits from using the facility exceeds the cost. 

Most people who engage with Nodem have often been trying to sell for six, nine months or more in the secondary market, to no avail.  

“Then they discover a firm like ours. 

“Our aim is to be part of that conversation from day one,” concludes Branton.

To contact Alex Branton at Nodem Capital, please email him at: [email protected]