Global infrastructure outlook trends in 2025

• The data center and decarbonization mega-trends will animate infrastructure fundraising and deal activity in 2025 
• Significant opportunities will emerge in building out utilities and power provision to support the data center boom    
• Signs of a soft landing after the rising interest rate cycle bodes well for toll road, airport and port assets 
• After a tough year for managers, fundraising sentiment should improve as sliding base rates drive up investor appetite for yield

The infrastructure space is well-positioned for a solid year of deal and fundraising activity in 2025 as interest rates subside and macro-economic conditions improve. 

As has been the case for other private markets asset classes, 2024 has been a challenging year for infrastructure. Annual fundraising is at risk of falling below 2023 levels, according to Infrastructure Investor, while CBRE has recorded declines in year-on-year infrastructure M&A during 2024. 

The next 12 months are likely to remain challenging and unpredictable for infrastructure managers and investors – after all, infrastructure fund dry powder has recently hit a record 24% of total global AUM, according to Preqin, indicating managers’ caution to deploy. But falling interest rates will help to put the asset class in a more stable position. 

For deep dives into key trends driving the 2025 global infrastructure outlook, read on. 

Infrastructure investment trend #1: Fundraising on a firmer footing

Fundraising activity will derive potentially the greatest benefit from lower rates, as investors emerge from the defensive crouch of the last 24-36 months and resume the search of yield as interest rates come down. 

Infrastructure will be ideally placed to serve investors as they gradually look for opportunities to take on more risk, as it offers returns at a premium to the risk-free rate while retaining defensive, inflation-resistant qualities, according to asset manager ClearBridge Investments. For investors who are still wary of downside exposure as economies emerge from a period of high inflation and rising interest rates, but have to sustain yields, infrastructure will be an ideal fit. 

The 2025 infrastructure vintage also holds the potential to deliver attractive returns for investors. 

ClearBridge Investments analysis shows that over the long-term infrastructure asset returns correlate strongly with infrastructure asset earnings growth. Since 2022, however, a recalibration of risk and valuations across all asset classes has seen infrastructure asset valuations drop even though earnings growth has proven resilient. This delta between earnings and valuations will fall back into the long-term pattern, presenting early movers with an opportunity to invest at potentially highly attractive entry multiples. 

Infrastructure investment trends #2: Going green and going digital

Fundraising and deal activity in infrastructure will be driven by the two mega-trends that dominated the asset class during the last 24 months – decarbonization and data centers. 

Both subsectors are underpinned by robust underlying fundamentals and have experienced little if any impact from recent capital markets dislocation. 

Decarbonization and targets to reduce emissions to net zero by 2050 have become compliance and regulatory essentials for all sectors, with regulators mandating higher energy efficiency standards and disclosure on emissions.  

The cost of building out new, green, low emission infrastructure, as well as repurposing existing legacy infrastructure assets will involve substantial resources and investment. According to S&P Global estimates $5 trillion of annual investment in energy transition will be required every year between 2023 and 2050 to meet Paris Agreement emissions reductions goals – triple current levels  

Governments will be unable to shoulder this obligation alone, opening up an investment opportunity of vast scale for infrastructure players. 

The fundraising market is already pivoting in this direction, with renewable energy fundraising the largest category for sector-specific infrastructure fundraising in 2024, according to Infrastructure Investor. And the deals are following suit – per Preqin’s Infrastructure Global Outlook, renewable energy accounted for 69% of primary deals in 2024 – its highest share since at least 2006.

Decarbonization will not be a one-way street, especially as the costs of energy transition are felt by taxpayers and consumers, pushing decarbonization into the political sphere. Nevertheless, the fact that decarbonization can also address other long-term energy pain points, such as cost of energy and energy security, gives the net zero project the necessary momentum to withstand any political or consumer resistance. The risks posed by climate change are simply too severe for governments to ignore. 

In the data center space, meanwhile, similarly robust fundamentals will power sustained investment opportunities. 

Demand for data is surging, particularly given the huge amounts of computing power that will be required to support the rapid growth of the AI sector, which private markets platform Partners Group forecasts will grow at a remarkable compound annual growth rate (CAGR) of 42 percent  to become a $1.3 trillion market by 2032. 

Investors and dealmakers have been racing to gain exposure to this dynamic sector, via both equity and debt investment strategies. The scramble for data centers shows little sign of slowing in 2025. 

Infrastructure investment trend #3: Classic categories. New opportunities

But while data centers and decarbonization will grab the headlines (and with good reason) 2025 also promises to be a good year for more established infrastructure categories. 

Indeed, as data centers grow so will the core utilities required to service them, most notably power generation. According to McKinsey, the power generation capacity required to support electricity-hungry data centers will have to more than double by 2030. Grid connection capacity will have to be ramped up in similar increments. 

Outside of utilities, other sub-segments such as airports, toll roads and ports are also set for a positive 2025, as the inflationary pressures that have weighed on consumer spending start to ease, and travel activity and demand for goods increases. 

According to the International Air Transport Association (IATA) global air passenger numbers are forecast to exceed 5 billion in 2025 for the first time, while global container volumes passing through ports are expected to climb by as much as 7 percent in 2025, according to shipping and logistics group Maersk. Toll road traffic is also expected to increase, particularly in centers with growing populations, with usage on most routes now back at or above pre-pandemic levels. 

New verticals may be expanding the options and growth opportunities for infrastructure stakeholders, but “old-fashioned” infrastructure assets look set to remain as attractive and valuable for investors as ever. 

Top private equity trends in 2025: 

• Improving valuations present a more favorable backdrop for new deals, and crucially exits, in the months ahead 
• Traditional exit channels are springing back to life and visibility on valuations becomes clearer 
• Alternative sources of liquidity from secondaries and NAV providers will remain important options for GPs, even as conventional exit volumes rise  
• Improving exit fundamentals could have a huge impact on fundraising markets, as an uptick in distributions enables LPs to increase deployment into new funds 

As private equity managers go into 2025, they will be hoping that after two years of declining buyout deal activity and flat fundraising, a long-awaited market recovery will finally manifest. 

Hopes that a rebound would swoop across private equity markets in 2024 never quite materialized, but as private equity stakeholders start a New Year, there is a quiet optimism that 2025 will be breakout year for deal activity. 

For deep dives into key trends driving the 2025 private equity outlook, read on. 

Private equity trend #1: Valuation visibility

Improvement and stability in asset valuations will help to kickstart deal flow in the year ahead. Uncertainty around asset valuations was one of the main reasons for falling buyout and exit deal activity, resulting in a widening delta between vendor and buyer pricing expectations through the cycle of high inflation and rising interest rates. 

It has taken time for valuations to respond to the first interest rate cuts registered in 2024, but there are finally signals emerging that private equity firms see asset prices moving higher. 

Green shoots have emerged in the growth and venture capital space – one of the first private equity segments to experience the fallout from tightening liquidity, risk aversion and higher capital costs. 

In November stalwart venture capital firm Sequoia, for example, a bellwether for the Silicon Valley investment community, marked up the value of its 2020 vintage fund by just under 25 percent. Even though the fund has yet to land any exits, the revised valuation represents a significant pivot in outlook from a market-leading franchise. 

In addition to portfolio mark-ups, start-up companies have also encountered a more favorable backdrop for funding rounds. Smart ring start-up Oura, for example, achieved a $5.2 billion valuation in its latest Series D funding round, more than double the valuation secured in a 2022 Series C round, while Moneybox, the digital savings and investment app, almost doubled its valuation in its October 2024 Series D round. 

The positive sentiment in the venture and growth equity space has bubbled up to the buyout market. The Argos Index, which tracks the average multiples of private, mid-market European M&A deals valued in the €15m to €500m range, for example, saw average multiples in Q3 2024 rally to 9.5x EBITDA after three years of continuous decline. 

Private equity trend #2: Private equity exit channels creak open

A more stable backdrop for valuations has supported an improving outlook for exits, and is momentum is sustained this can unlock a wave of exits in 2025. 

According to White & Case Debt Explorer figures, global exit deal value in Q3 2024 was up for the third quarter in a row, with combined exit value of US$94.06 billion representing the highest quarterly exit value in a year. Global exit volume numbers are also looking in encouraging, with the 429 exits posted in Q3 2024 representing the most active quarter for exits since Q3 2022. 

GPs are not popping the champagne corks just yet, but there is a sense that asset class can build on this momentum and that the worst of the exit drought may be over. 

A GP survey conducted by EY and published in Q3 2024 showed that more than half of GPs (53 percent) expect exits to increase in 2025 – up from 34 percent at the start of the year. 

Private equity trend #3: Alternative liquidity 

Even as traditional exit pipelines are unblocked, alternative liquidity options will remain a valuable source of liquidity – and distributions – as the private equity market transitions back to a steadier exit pace. 

The slowdown in exit activity during the last 24 months has seen GPs explore alternative routes to liquidity in order to expedite distributions to LPs, and even as the exit backdrop improves, these alternative exit routes have proven their viability and will remain a key part of the exit mix. 

Continuation funds, for example, where GPs shift selected assets into a separate vehicle, giving incumbent investors the option to either roll their interests into the new structure or take cash, have evolved into an established way for GPs to make distributions without selling prized assets. According to figures from Jefferies, continuation funds accounted for 14 percent of sponsor-backed exit volume in H1 2024 – a record high and a vindication of the continuation fund as a credible route to exit. 

Similarly, NAV financing will continue to push further into the mainstream, providing liquidity for sponsors to fund portfolio companies beyond fund investment periods and in some cases make distributions. The increasing use and acceptance of NAV finance has seen the market more than double in size since 2023 according to 17Capital. Growing familiarity and comfort with the product among the GP community will drive ongoing uptake of NAV facilities through 2025.

Private equity trend #4: Unlocking fundraising in the private equity space

Upping distributions to LPs – through both traditional and alternative channels – will be crucial to reigniting a fundraising market that has been stagnant at best. 

Pitchbook figures analyzed by EY estimate that 40 percent of the companies held by private equity companies have been sitting in portfolios for more the four years. 

With significant pools of LP capital locked up in these assets, it is imperative that managers start to clear the backlog and get the fundraising wheels moving again. 

Exits and distributions will have to reach a certain threshold to reignite LP interest in making new allocations, but even though there is still a way to go, there are flickers of light at the end of the tunnel, with LPs starting to talk about potential spinouts and first-time funds for the first time in years. 

After a period of prolonged dislocation 2025 is a year for the private equity ecosystem to move back into balance. 

A period of high interest rates has made liquidity hard to come by for private markets managers.

According to MSCI figures, private equity distributions came in at just 8.7 percent of valuation in Q1 2024, little more than a third of the average distribution rate of 23.5 percent for the period between 2015 and 2019. Slowing distributions have had a direct impact on fundraising efforts, as LPs wait for cashflows from existing portfolios to come through before ploughing resources back into a new vintage of funds.

With liquidity at a premium, the still relatively young alternative asset ecosystem has demonstrated its ability to adapt to changing circumstances and embrace new mechanisms to generate capital and keep momentum. and embrace new mechanisms to generate capital and keep momentum.

In the fourth and final article in a series exploring the alternative routes to liquidity that managers have available, Alter Domus looks into how securitization structures, including collateralized fund obligations and rated feeder funds, have enabled managers and investors to unlock capital flows in a tight market.

Part 4: Securitization

Securitization- the bundling together of assets into a vehicle that sells shares to investors- is an established practice in fixed income markets, but has been rare in the private funds space.

The slowdown in private equity distributions and fundraising as a result of elevated interest rates, however, has supported growing interest from managers and investors in securitization as a tool to enable capital to flow into the private markets ecosystem more easily and through different channels.

In October 2024, for example, AlpInvest, the integrated private markets platform owned by the Carlyle Group, secured its second securitization with the successful close of a $1 billion collateralized fund obligation (CFO) that exceeded its $800 million target.

Private funds securitizations are still relatively uncommon, especially when compared to the high volumes of securitization deals seen in other markets, such as the issuance of collateralized loan obligations (CLOs) in the broadly syndicated loan space. Interest in private funds securitization, however, has been growing steadily in recent years and we at Alter Domus have been helping our clients navigate this, particularly through the rising interest rate cycle as other liquidity channels have tightened.

Private funds securitization: how it works

Securitizations are complex transactions, but in essence, in a private funds context involve the pooling together of LP interests in a variety of underlying private markets into a special purpose vehicle (SPVs), which then sells rated debt notes to investors.

These SPVs are organized in tranches, with different tranches then sold to investors, in line with specific investor requirements and risk appetite. Senior tranches will carry lower risk and offer more predictable returns, with the risk-reward balance shifting accordingly for lower tranches of the SPV structure.

In private funds, securitization can be executed through either a CFO structure or rated note feeder (RNF). There are important technical differences between CFOs and RNFs, but there are also broad similarities, as both structures effectively allow investors to gain exposure to private markets funds, but through a debt-like product rather than an equity investment.

The securitization channel into private markets funds is especially attractive for investors and institutions who have to consider regulatory capital requirements when deploying capital.

CFOs and RNF tranches have to receive credit ratings from ratings agencies, and as debt instruments with high credit ratings receive more favorable regulatory capital treatments than direct equity investments into private markets funds, CFOs and RNFs have proven especially appealing to insurance companies and sovereign wealth funds. The structures have been an ideal fit for these institutions, who have wanted to grow private markets exposure without throwing their regulatory capital ratios out of whack.

CFOs and RNFs, however, have also been gaining appeal with other investors, who do not have to comply with strict regulatory capital rules, as the tranches within the vehicles enable investors to tailor private markets exposure to their particular investment requirements.

For managers, meanwhile, the structures have provided additional routes into new investor bases at a time when capital is at a premium, and traditional fundraising options have been constrained.

Operational excellence essential

Taking advantage of the potential liquidity that securitization can provide, however, requires a manager to have robust back-office rails in place to manage the complexities and operational demands that come with CFO and RNF vehicles.

The reporting, disclosure and fund accounting demands that come with a CFO or RNF are at another level when compared to conventional, 10-year closed ended LP-fund requirements.

For starters, receiving credit rating for a CFO or RNF requires a manager to provide high volumes of often unpublished information on financials, governance, risk management and business strategy and earnings forecasts. Applicants will also often be asked to make detailed presentations to ratings analysts before a rating is issued. The demands the application process places on back-office teams is not to be underestimated.

The day-to-day management and accounting of a CFO or RNF will also require significant back-office support from a trusted partner like Alter Domus, with managers obliged to keep track of payment waterfalls to various investors, according to which tranches of the structure that they hold, as well as ensuring that the sponsors or originators of the securitization maintain the necessary risk retention thresholds in the securitized vehicle to comply with regulatory requirements.

Help at hand

An experienced fund administrator that is well-versed in the mechanics of securitizations and private markets can provide managers and their investors with invaluable bandwidth and experience when it comes to setting up and operating an CFO or RNF effectively.

Alter Domus, for example, has more than US$2.5 trillion of assets under administration and network of 39 offices in 23 jurisdictions, giving it the scale and global regulatory and commercial expertise to support CFO and RNF formation.

We also have extensive securitization experience, and our CLO manager services practice has a long track record of successfully providing managers with comprehensive operational support that extends beyond core loan servicing tasks to include compliance with governing guidelines and rating agencies, scenario planning and modelling, and managing trustee data.

Specialist fund administrators also have the scale and resources to make significant investment in specialist, proprietary technology tools focused on securitizations. Our innovative technologies have been relied upon by asset managers and trustees in the CLO space for decades to streamline processes, lower operating costs and limit errors and risk.

Replicating this experience, technology infrastructure and back-office scale is incredibly difficult for managers to do in isolation, as it involves large upfront capital expenditure and ongoing maintenance and servicing costs.

Working with trusted partner enables managers to plug into established infrastructure and institutional expertise, allowing managers to take advantage of the liquidity that securitization can bring their firms, without having to worry about mushrooming operational costs and risk.

Raising a private equity fund has been hard-going during the last 36 months, with a few minor exceptions.

Rising inflation and elevated interest rates have seen sharp declines in private equity exit activity, which has bottlenecked distributions to investors resulting in limited capital to plough into the next tranche of private equity funds.

Limited flows of capital from private equity programs have given LPs fewer options, and in a choppy, volatile market, most investors have set aside the capital that they do have available for a select cohort of the biggest private platforms, seen as the safest pairs of hands.

The upshot is that a bigger share of the smaller private equity pie has been absorbed by a smaller group of managers. Bain & Co analysis shows that in the buyout space from January to May this year, the ten largest funds to close took out almost two-thirds (64%) of total capital raised during the period.

As capital has been funnelled into fewer hands, managers have had to adapt and explore other options for fundraising and new investor pools.

Private wealth and non-institutional capital has been an obvious avenue to turn down, and feeder funds have provided one of the most valuable channels to reach this emerging cohort of private equity investors.

In the third of a four-part series exploring the alternative routes to liquidity that managers have available, Alter Domus looks into how feeder funds can help managers sustain fundraising efforts against a challenging backdrop.

Part 3: Feeder Funds 

At a point in the cycle where institutional investors have taken a “risk-off” approach to new private equity allocations, the potential of the non-institutional space has been pushed firmly into the spotlight.

Managers have seen non-institutional capital as a long-term driver of private markets assets under management (AUM) growth. Bain & Co forecasts have estimated that during the next ten years individual allocations to alternative assets (AUM) could triple from current levels to reach as much as US$12 trillion.

As the supply of institutional capital has tightened, however, managers have accelerated efforts to secure more capital from non-institutional clients.

One of the primary channels for reaching individual investors have been feeder funds, and the private markets ecosystem has been ramping up efforts to increase capacity to reach more potential non-institutional investors.

What is a feeder fund?

Feeder funds are investment vehicles to pool together capital commitments from groups of investors and then funnel this capital into an umbrella or master fund, deploying the capital in new investments.

The feeder fund structure has helped to widen access to private markets investments by bringing down the investment minimums that would usually be required secure exposure to new a fund.

By pulling together capital from groups of non-institutional investors, feeders can amass sufficient scale to gain traction with GPs on the fundraising trail, but keep investment minimums at a much lower threshold than if an individual were to invest in a fund directly.

Feeder funds have been around for a long time, but predominantly through the private wealth divisions of investment banks, who draw in allocations from high-net worth clients and then effectively interact with managers as single LPs.

As more individuals and non-institutional investors have noted the returns on offer in alternative assets, however, other channels with feeder fund attributes have emerged to service growing demand. Online platforms, such as Moonfare and Reach Alternative Investments, to name but a few, are examples of innovative, tech-enabled feeder fund platforms that enable investors to make allocations with investment minimums as low as €50,000 in Europe and $75,000 in the US.

Putting the right rails in place

For managers that are seeking capital from non-institutional investors via feeder fund structures, it is crucial that managers have the necessary back-office infrastructure in place to manage the additional requirements and obligations that come with taking on investment through feeder fund structures. And that’s where Alter Domus comes in.

The underlying investors in feeder funds will require different levels of education and reporting to what managers are used to in an institutional context. Private banks and online platforms will provide invaluable support in curating reporting and investor materials to align with what non-institutional investors require, but it ultimately does come down to manager to lead on the production of regular reporting and net asset valuations for a non-institutional audience.

The requirement for more frequent reporting, and reporting that differs from what is already produced for institutional backers, does place added workloads onto back-office teams. We have found that the use of technology-embedded bespoke processes can elevate this burden.

Workloads are further ramped up as targeting a non-institutional investor also requires significant investment in the production of investor marketing and education materials. The back-office becomes a crucial enabler of front office fundraising and marketing efforts, are teams require information packs and educational materials to engage with individual investors, explain how private equity works, and what investors should consider when allocating to private equity.

There are also individual tax considerations that managers have to be aware of, as well as regulatory frameworks covering individual investors in different jurisdictions.

Depending on the jurisdiction, non-institutional investors have to meet certain eligibility criteria. This is usually linked to a minimum levels of investment assets or evidence of investment expertise, in order to qualify as private markets investors.

Onboarding high volumes of non-institutional investors and making the required know-your-client (KYC) checks can also become overwhelming for managers that don’t have operating models of a certain scale.

Seeking support

Working with a third-party fund administrator, like Alter Domus, can help managers seeking to raise capital from feeder funds with scalable resource and extensive non-institutional experience.

With an extensive global footprint and large compliance teams, Alter Domus has the capability to cover the eligibility criteria and tax arrangements of underlying feeder fund investors around the worlds, freeing up GPs to focus on winning new non-institutional clients knowing that regulatory and tax issues are being manager by an experienced and trusted partner.

Third-party administrators will also have the bandwidth to invest in proprietary technology, AI-powered software and automation to process high volume back-office tasks – a helpful resource for managers that find they have to manage rapidly rising volumes of KYC checks and client onboarding as more individual investors gain access to their funds.

The opportunity to secure more capital from individuals presents not just an invaluable short-term fix for slowing institutional allocations, but a long-term opportunity to build a new category of LP that could be the main driver of long-term AUM industry growth.

Seizing this opportunity requires not just an excellent investment track record and returns profile, but a robust operating backbone to handle the particular demands that come with serving a non-institutional client base.

An experienced fund administration partner can be there to support managers along every step of that journey.

Investors in private markets funds have had to play a waiting game when it comes to receiving distributions from managers.

Rising interest rates have put the brakes on M&A and IPO activity, forcing managers to hold portfolio companies for longer. Buyout funds in North America, for example, saw hold periods rise to 7.1 years in 2023 – the longest hold average hold period in more than two decades, according to the Preqin figures reported by S&P.

Bain & Co analysis of Preqin data, meanwhile, shows buyout managers sitting on a record $3.2 trillion of unexited companies in their portfolios.

With exits at a premium and liquidity more prized than ever, managers are exploring all options available in an effort to realize value and start making distributions to investors.

In the second of a four-part series exploring the alternative routes to liquidity that managers have available, Alter Domus looks into how the NAV finance industry has stepped up to offer new routes to liquidity for managers.

Part 2: NAV Finance

Less than a decade ago there would have been few corners of the capital markets ecosystem that would have been as less understood then NAV Finance.

Sponsors would have used other fund finance tools, such as subscription line finance (where sponsors take out short tenure bridging loans to streamline the capital call process) regularly, but NAV finance, where managers take out loans secured against the underlying portfolio companies in their funds, was a small, niche part of the market, used by only a handful of managers.

During the last five years, however, the NAV finance has undergone a remarkable phase of growth. Between 2020 and 2023 NAV finance more than doubled to around US$44 billion, according to figures from 17Capital, an NAV Finance market pioneer.

The shuttering of mainstream financing sources in the immediate aftermath of the first pandemic lockdowns, followed by the rising cycle of interest rates in 2022 and 2023, saw the NAV finance option rise to prominence.

NAV loan terms are bespoke, and can offer loan-to-value (LTV) ratios starting at ten percent of the NAV part of a portfolio, with scope to move as high as 60 percent for quality portfolios that are highly-diversified, with spreads varying accordingly.

Relatively low LTV ratios, and the fact that NAV loans are cross-collateralized and secured against a portfolio of assets in a fund, rather than individual portfolio companies, has made the product an attractive option for lenders and investors, helping to grow the market. At Alter Domus, we have seen firsthand the growth of this trend and supported our clients to maximize the opportunity.

A liquidity lifeline for GPs

For managers, NAV finance has become a valuable source of additional liquidity, particularly given the tight financing conditions of the last 24 months.

Managers have used NAV finance in different ways.

For managers that have built up a solid portfolios of assets, but are approaching the end of the typical five-year investment period, NAV finance has served as a source of capital to fund additional rounds of platform company acquisitions or inject further capital into portfolio companies where they continue to see opportunities and the opportunity set has surpassed initial growth plans.

A NAV loan can provide a cheaper line of capital to fund these opportunities and save managers from having to deal with the complexity of extending investment periods or bringing in additional outside equity.

NAV finance can also be used to support portfolio company refinancings and capital structures. Rather than individual portfolio companies having to carry the load of more onerous refinancings in a higher rate environment, a manager can bring in financing at fund level to maximize operating leverage without squeezing headroom at individual portfolio company level.

In recent years, managers have also used NAV loans to help finance GP commitments and in some cases, managers have also used the products to make distributions to investors.

Rather than selling assets into weak M&A or IPO markets, where vendors will more than likely have to accept discounts to NAV, even for quality assets that would trade at a premium against a different macro-economic backdrop, sponsors have taken out NAV loans and used the proceeds to make distributions back to investors.

In an otherwise illiquid market, this has enabled managers to send cash back to investors without having to sell prized assets into a down market.

In a NAV structure, where LTVs are calculated at NAV, rather than at a discount to NAV, managers can take out liquidity without having to compromise on valuation.

On the whole, investors have accepted that NAV financing can provide a cost-effective way to support and fund portfolio companies beyond initial investment periods.

There are, however, also concerns among investors that NAV loans are adding further layers of debt into already leveraged private equity structures, and that there the cross-collateralized nature of NAV loans can see stronger companies in a portfolio impacted by under-performance in weaker portfolio companies.

Some LPs have also been skeptical of the sustainability of using NAV loans to unlock liquidity for distributions.

These reservations will have to be addressed by managers and NAV financing providers, but even though some stakeholders are yet to be fully convinced of NAV finance’s value, there is momentum and a track record behind the industry that will see it continue to grow.

As more managers use the product, 17Capital and Oaktree Management (which acquired a majority stake in 17 Capital in March 2022) are forecasting that NAV finance could grow into a $145 billion market by 2030.

A liquidity lifeline for GPs

For managers that want to take advantage of the flexibility and liquidity that NAV financing can provide, it is crucial to have the necessary operational and technology backbone in place to be able to track and report on how NAV facilities are used and serviced.

Given some of the investor concerns around the use of NAV financing listed above, transparency is essential for securing long-term investor buy-in, which will require back-office teams to clearly communicate and engage with LPs on NAV loan usage in accounts and investor reports.

Managers will want to avoid situations where LPs find out about the use of NAV loan facilities before a manager has proactively disclosed that it has taken out an NAV loan facility.

There are further reporting and accounting demands that come with NAV loans. Investors will expect reports on how the use of additional leverage at fund level is impacting distributions and returns.

Distributions from NAV loans can also be clawed back in some circumstances, with tax, cash flow, and interest cost implications that managers should be modelling and disclosing.

Back-office teams will also have to be able to produce regular NAV calculations in order to establish LTV ratios (rather than the typical quarterly NAV reports) and will also have to account for the potential impact of a weaker company’s default on the wider portfolio, given the cross-collateralized nature of the typical NAV loan structure.

Taking on a NAV facility can squeeze back-office teams that are still coming to terms with the ever-rising regulatory, reporting and disclosure requirements that managers have had to deal with in recent years.

Working with a third-party fund administration partner like Alter Domus can help managers to scale-up their back-office capability without having to incur high capital expenditure technology and staff costs.

We work with managers as a co-sourcing or outsourcing partner, and also counsels managers on how to select and implement best-in-breed alternative assets software to improve operational efficiency

Fund administration specialists will also have the experience and technical capability to handle the reporting and disclosure requirements that come with taking on NAV loan facilities, giving managers piece of mind that their organizations are tracking NAV loan usage and providing accurate and regular reports to investors on the facilities.

Finally, we have the scale to make investments in proprietary technology, powered by AI, that help back-office teams to handle higher volumes of work and have the bandwidth to cope with NAV loan reporting and disclosure requirements.

As mentioned in the first article in this series, Workflows is an AI-powered application that automates high volume back-office tasks, freeing up key back-office resources to handle bespoke and complex NAV loan facility disclosure and reporting work.

Managers who have a solid operational foundation place will be in the best position to take advantage of the flexibility and a liquidity that NAV finance provides at a point in the cycle when mainstream sources of capital remain constrained and conventional exit pathways narrow.