Private equity funds are borrowing against themselves, with the help of insurers

(Bloomberg) –Apollo Global Management Inc. is at the forefront of a growing trend: insurers lending to private equity funds that want to borrow against their investments. 

Athene, an Apollo unit, is one of several insurers ramping up their participation in net asset value financing, an increasingly popular form of borrowing for private equity funds that need liquidity amid a tough market for cashing out holdings. 

Demand for these loans is climbing just as US regulators seek to impose higher capital requirements on the largest banks, leading some to be more selective in providing the debt. Enter insurance companies, which have different capital rules than banks and a thirst for high-yielding, long-term assets. 

About 20 insurers are investing in NAV loans to private funds, including Pacific Life, Allianz Life and Protective Life, according to regulatory documents and people who work in the industry. In December, investment manager AllianceBernstein LP launched AB NAV Lending with an anchor investment from insurance firm Equitable Holdings Inc. 

Athene is perhaps the most high-profile insurer to enter the market, gaining prominence after acquiring large portions of NAV loans that its parent Apollo arranged and syndicated for Masayoshi Son’s SoftBank Group Corp. and Chase Coleman’s Tiger Global Management. Athene’s firepower has given Apollo the ability to lead bigger loans, like the $1 billion NAV loan Warburg Pincus took out in December to pay down bank facilities involving an older fund. 

“These types of financings are very attractive to insurers,” said Leah Edelboim, a partner in the fund finance practice at Cadwalader, Wickersham & Taft. “We are seeing more and more insurance providers either leading deals or coming into syndications.”

Athene, created in part to help Apollo tap into the billions of dollars that baby boomers and other retirees are putting into annuities, will often acquire a chunk of each NAV loan that Apollo writes. The insurer invested roughly $767 million in NAV loans made to Tiger Global’s venture capital funds during the past two years, the filings show. And in March, Athene acquired a $93 million interest in a five-year NAV loan that Goldman Sachs Group Inc. put together for Vista Equity Partners Fund VII. 

Representatives for Apollo and Tiger Global declined to comment. A Goldman representative didn’t immediately return a call seeking comment. 

Rate-fueled Boom

NAV loans were once a little-known niche within the fund finance world, where smaller private equity funds obtained loans by pledging their investments in closely held companies as collateral. The financing was only available from private credit firms such as Hark Capital and 17Capital or from a few global banks including Goldman Sachs and JPMorgan Chase & Co.

The NAV loan market began to draw more attention during the pandemic, when private equity firms turned to them for cash to tide over the companies they owned until the economy recovered. But it really took off as interest rates jumped and the IPO market floundered in 2022, shutting off traditional sources of liquidity for private equity funds. Now firms are using them to invest more in their portfolio companies, make additional acquisitions or — in a more controversial use of late — pay out distributions to investors.

“Higher interest rates are making the exit markets very difficult for private equity sponsors,” said Doug Cruikshank, the founder of New York-based Hark Capital. “They need NAV loans more than ever as a bridge between the companies they have now and when they can sell them.”

Even blue-chip firms are turning to NAV loans. Blackstone Inc. late last year said in regulatory filings that some of its funds “have entered into or are expected to enter into” NAV credit facilities, as well as subscription credit lines, a more common form of fund financing. 

MassMutual was an early entrant to the market among insurers. It established a direct private investments team in 2017 that provides proprietary secured loans backed by a range of assets to private capital managers and funds, a person familiar with the company said. MassMutual didn’t return calls or emails seeking comment.

SoftBank Deal

Apollo’s first big financing was a $4 billion NAV loan of sorts in December 2021 for SoftBank, secured by the $40 billion technology venture fund SoftBank Vision Fund 2. Following the SoftBank deal, Athene provided financing to other funds, including those run by Apollo as well as other money managers, regulatory filings show. 

Larger managers such as Blackstone have bigger funds, and that means they need bigger loans. Some NAV financings are approaching $2 billion and thus need multiple lenders.

“No one can hold a loan for $1 billion to $2 billion” on their own, said Pierre-Antoine de Selancy, a co-founder and managing partner at London-based 17Capital. 

Apollo, like bank lenders in the NAV sector, typically limits the size of its loans to no more than 10% of the assets pledged as collateral. This not only protects against losses, but also helps the NAV loans obtain investment-grade credit ratings, a vital step for banks to syndicate the debt to insurers.

The influx of insurer capital is prompting lenders to get credit ratings for NAV loans they plan to syndicate. The credit ratings not only give insurers insight into the riskiness of a NAV loan but also reduce the amount of regulatory capital they must set aside for the debt, said Gopal Narsimhamurthy, head of the fund ratings group at KBRA, the largest rater of NAV loans.