Overview
During this session, the panelists explored whether portfolio company support should come from the sponsor or lenders when portfolio companies require additional funding. They discussed when to deploy sponsor-backed financing solutions and when it may be more advantageous to seek lender-driven alternatives. They also provided their insights on structuring, negotiation tactics, and how to navigate the pressures from competing stakeholders to achieve successful outcomes.
Session panelists:
- Viravyne Chhim, General Counsel & CCO, MGG Investment Group
- Afsar Farman-Farmaian, General Counsel, Varagon Capital Partners
- Jason Snider, Partner, CFO, Gauge Capital
- Moderator: Anh Lee, Partner, McDermott Will & Emery
In Depth
Top takeaways included:
- Equity as an Alternative.
- During the term of a portfolio company investment, when portfolio companies have working capital or other liquidity needs, sponsors have many levers to pull from. Often, sponsors must decide whether to have the portfolio company take on additional debt financing or support the company through follow-on equity investments.
- There are many considerations to take into account. One of the most important from the lender’s perspective is managing relationships with sponsor clients. From all parties’ perspectives, it is essential to align interests from the start so all involved parties can avoid misalignment of interests in the capital structure. Lenders are usually eager to provide additional funding for working capital needs if a portfolio company is performing well or if the platform is anticipating add-on acquisitions.
- Common forms of follow-on equity support include preferred equity, sponsor guaranties, sponsor capital call agreements, and/or a “qualified borrower” line of credit under a sponsor’s subscription facility. For follow-on equity investments, not only is a sponsor’s role and/or fund economics a consideration but sponsors also must consider the position of their co-investors. Investors who are considering providing liquidity for working capital require incentives to fund those operational needs.
- An Increase in NAV Lending.
- The panelists’ recent experiences and a poll of Finance Strategies Forum attendees suggest that “net asset value” (NAV) facilities are becoming a more popular financing option for funds given the flexibility fund borrowers have in structuring these types of facilities.
- NAV facilities are more common later in a fund’s lifecycle as unfunded capital commitments wind down, but the need for capital continues to grow to further portfolio company investments.
- For this later stage of portfolio company investment, NAV facilities present a promising option for financing ongoing capital needs since borrowers and lenders can be creative in negotiating economic terms and collateral packages.
