Episode 138: Aryeh Landsberg of 17Capital
on NAV Lending and Fund-Level Capital Strategy

Episode Transcript   

Shiv Narayanan (00:10.978)

All right, Ari, welcome to the show. How's it going?

Aryeh Landsberg (00:13.688)

Great, Shiv. Thanks for having me.

Shiv Narayanan (00:15.202)

Yeah, excited to have you on. So why don't we start with your background in 17 Capital and then let's go from there.

Aryeh Landsberg (00:21.39)

Sure. My name's Ari Landsberg. I'm a managing director at 17 Capital in New York City. I joined 17 a little over a year and a half ago, having spent about 18 years at various banks, Barclays and Citi, focused on fund finance structuring. And a little background on 17 Capital. We are a dedicated NAV lending specialist. And so what that really means is we since two thousand and eight and our founding been providing capital to the private equity ecosystem, both to the general partners, the management companies, and to the funds themselves, generally for accretive investments across their platforms.

Shiv Narayanan (01:05.112)

Got it. And can you expand on that? Like the NAV financing is obviously one type of financing available to PE firms. So what are the different avenues available and like why would they choose NAV financing versus let's say some other vehicles or options?

Aryeh Landsberg (01:19.692)

Yeah, so NAV financing I think is a bit of a catch-all, but the way we think about it is again, high level lending against the assets of a portfolio. And that filters through all when we're thinking about the ways we help GPs and management companies as well. And I think the reason is it's really an extremely flexible approach. It allows managers to invest capital in their platform broadly and flexibly and with you know, minimal constraints on how they would normally operate their business. And so I think that it fits really well along with other types of financing. If you think about all of the financial engineering and the levers that managers can pull when they're constructing their capital, their capital structures for their portfolios, for their funds, you know, at a simple level, right? A fund will have each company will have its own debt structure, its own capital structure. The fund itself will have various liquidity lines and it may have hedging instruments and things like that. And NAV financing and portfolio financing in general fits well with each of those. What we're talking about is lending to the fund to allow multipurpose financing down into the ecosystem. And that could be for additional investments in the portfolio, it could be for working capital, it could be for refinancing, and it could be to make additional new investments, you know, on top of, you know, any existing portfolio company needs. So it's just a really flexible approach to building out a fully formed fund to optimizing returns and optimizing the leverage, which, you know, really enhances returns but also reduces stress levels amongst the management team when there's volatility. And I think that there's always some degree of volatility, you know, when portfolio managers are are thinking about a five or a ten year investment horizon. And so NAV is just a constant tool in the toolkit to help them manage and smooth out the LP experience.

Shiv Narayanan (03:30.838)

Are you seeing firms have an increased need for NAV financing now, versus let's say three years ago with the uncertainty in the market today?

Aryeh Landsberg (03:42.902)

Three years is an interesting reference period. So I'll answer that with a caveat. I would have expected, given all of the macro volatility in the world, that we'd see a lot of deal flow and a lot of inbound requests for additional leverage into the system, just given you know, to pick a few, geopolitical events, trade volatility, you know, disruption from new technology, be that AI, be that investment in infrastructure. And we certainly have, but for a slightly different set of reasons. I think that overall equity valuations are really strong. Underlying earnings performance has been really strong. And so we haven't seen I think a need for what I would term, and there's probably a better way to phrase it, bailout financing. It hasn't been companies going through stress looking to utilize additional forms of capital through leverage. It's been really opportunistic. It's been managers who are performing really well, looking to deploy further to gain an edge in terms of what's been, I think, a surprisingly resilient market for acquisitions. You know, if you think about a competitive bidding process that a the traditional and well performing PE manager will be experiencing or has experienced over the last few years. It's been there have been active bids, the valuations have remained high. And so a lot of the I'd say the primary use of NAV facilities has been for accretive M&A. And you know, as I mentioned, it's not just existing platforms looking for, you know, to continue their roll-up or consolidation thesis. It's been you know, active sell side processes where certainty, speed, the ability to write a check, you know, write a larger equity check maybe is the winning component to a competitive process. And so that's been by far the most common use of NAV loans over the last three to honestly going back to probably twenty twenty one, we've seen that trend continue. And it's really crescendoed recently, given where public equity markets are.

Shiv Narayanan (06:09.453)

Got it. And yeah, can you talk about those use cases a little bit more? Because I totally see the resiliency when we work with our PE partners and they've continued to grow these investments. You mentioned a bunch of different use cases there, like finding work and capital, making more accretive you know, investments. Is that the primary use case? And can you expand on like why go this route versus just deploying the fund and raising another fund?

Aryeh Landsberg (06:34.518)

Yeah, and so there's a bit of a complicated interplay between the life cycle of a fund and what options and flexibility the sponsor wants to retain, right? So just to give you an example, our most typical use case comes somewhere between years three and five after a fund is launched. And so maybe to translate that ballpark in terms of where they are with their with their investment cycle, that's they're probably 70 to 90% capital called, right? So what they might have normally done earlier in their life cycle is use their subscription line to you know to fund the proceeds for an investment and then eventually called capital, whether that be the next quarter or at some regular interval. And so later in the lifecycle, they've called most of that capital. The capacity under their subline is diminished. It's certainly less durable, right? They're not going to have another four or five years with that form of capital and they also may have additional capital needs and that might be part of their business plan. You know, earlier portfolio companies might have always envisioned opportunistic roll ups. The current market volatility might have made some of those more attractive. And on the other hand, whenever those opportunities come up, maybe the financing market conditions have changed. Their traditional lenders are either charging more, have less capacity, or just gonna take longer to deliver that. So in that scenario, the NAV loan is really a part of their overall analysis of how much flexibility and optionality they want for that last 10 to 15% of capital.

Shiv Narayanan (08:13.965)

Got it. Okay, so they want to deploy more or maybe buy a certain type of asset and having some more debt can help them kind of get the most out of that particular fund.

Aryeh Landsberg (08:23.318)

Yeah, interestingly, the capital experientially is gonna feel and act like equity from an investment perspective, right? Because it's happening at the fund level. So the fund borrows and then the fund makes an equity investment into the structure of whatever they're buying, whether it just be an M&A opportunity for a roll up or for a brand new platform. And the structure is really flexible. You know, happy to spend time on how it looks from a boxes and arrows perspective, but I think the use case is really the same. It's managers who have a number of competing and overlapping needs for capital, not just from an investment perspective, but maybe it's from a fee perspective. And maybe it all factors in, I think, a bit to what's unknown, right? Where are they with their ability to deploy across their platform overall? Do they have captive capital in the next fund on hand. Have they raised their next fund? Are they already deploying? What have they messaged to their LPs from a performance and from a deployment perspective? And, you know, as a broader theme, I think liquidity has been more difficult in terms of exits, in that distributions from private equity funds have been trending down. You know, there's been some really prominent sponsors, you know, the Bains and the Apollos of the world who have highlighted that the backlog of exits needed just to catch up to mean is approaching like four or five years. And that's ballpark. So don't hold me to that. But the point being is there really needs to be a significant acceleration in distributions for the institutional investors in the private equity space to get back to what they were hoping or had been modeling from a cash flow perspective. And so that's a complicated kind of matrix of decisions that private equity managers have to think about when they're not just trying to get the best returns, but deliver on what they've told their LPs.

Shiv Narayanan (10:22.731)

Right. So so I guess a question that I have is why not like leverage whatever's in the fund and invest in an asset and then take a loan against the investment, which a lot of people do when they're making these kinds of investments with their fund. Why take on a NAV loan through the fund as a way to deploy the cap?

Aryeh Landsberg (10:44.076)

Yeah, they may do both, right? So we generally will see that, you know, the capital markets folks and the finance folks and the investment team will have been taken a thoughtful underwrite to the ideal capital structure for their portfolio companies, right? And whether that be the you know loans or debt at the at the opco, at the holding co, you know, all through their structure, they'll optimize it, right? And for asset heavy investments, you know, particularly we see this in infrastructure and data centers and things that have recurrent revenue, you know, or recurrent cash flows at least, like even as advanced as doing securitizations and things. So you'll see sophisticated institutional investment professionals being smart and doing the things that their LPs pay them to do. Where I think we're most accretive is when there's a benefit either from a direct cost of capital, you know, in some cases the traditional lenders are just going to charge more at a given time or not be able to speak for the full size. And so there'll be a less a lower degree of certainty around what might be an actionable investment opportunity. And NAV can kind of stand as a replacement or an auxiliary form of capital for those types of opportunities. And additionally it's difficult to see, particularly in times of volatility, like where your source of financing will be when there's disruption to those markets, right? We've seen some volatility in the private credit landscape, right? With the direct lending folks and some of the stresses around you know what has been traditionally really strong inflows. And I think as a source of additional funds into this private equity ecosystem, it's just been, it's been easier the last couple of years than I think it's going to be in the next couple of years. That said, there there'll still be ample capital. The banks are always going to be a provider of capital to their best relationships and the largest managers. And I think that NAV financing is just an additional element that fits well with all of those dynamics. And it has the benefit, I think, of dampening some of that immediate volatility because it's based on a portfolio. It's not reliant on a single company's performance. And it's usually not reliant on a single company's exit timing, right? It can be a little bit more structured and nuanced in terms of when it gets paid back and what the form of upstream distributions are that actually start to pay down the fund level NAV facility. And that gives managers comfort that if they're wrong about their timing, they're not necessarily forced to sell something that won't get top dollar at that moment of time.

Shiv Narayanan (13:35.317)

Yeah. Can you expand on how you're underwriting these deals? Because like the you touched on that it there, like that kind of spreads out the risk across the portfolio or the fund.

Aryeh Landsberg (13:45.74)

Yep, yep. So I'll do a little bit of shameless promotion for our platform because I think it's unique and others will do it differently. But you know, I consider us, you know, if not the then one of the scaled players in the space and we just have a really big investment team. We can throw a lot of resources. You know, we have 30 investment professionals across New York and London who can really look at an opportunity and underwrite it really quickly. You know, speak with certainty, speed, and the way we do that is we've pulled from I think a diverse set of investment bankers, former consultants and sell side advisors and fund finance folks like myself to look at an underlying fundamental analysis of the portfolio companies themselves, their operating history, their valuations. But really what's most important is you know, the muscle memory and experience working with the managers, right? There's a great deal of reputational and operational experience that matters a lot here in terms of managers doing the right things and having a track record of executing through economic cycles. And the best managers and the ones that continue to raise funds and continue to perform for their investors will have had multiple successful vintages. In some cases the broadest scale players are now public and are managing investments across multiple asset classes. And, you know, we'll do a deep underwriting of their internal processes, their track record, their exit history. And that that may be as granular, just to give another example, in terms of the average delta between where they have things marked quarter over quarter and where they exit and what their base case timeline was for exit. And their exit multiples and their exit margin expectations at entry, and then what they actually got and what they saw. So how well have they performed? And then how well have they translated that performance into returns? And so it's really a multi-process matrix of just getting comfortable with the manager that we're partnering with. And then maybe even on a specific asset by asset basis, what are our qualitative and quantitative views of the valuation and its prospects?

Aryeh Landsberg (16:06.52)

And I think that that's really important now as we're kind of at a broader inflection point with you know, with I think technology really, you know, not not to use an overused word, but disrupting expectations of what certain companies were going to be and how they're going to adapt to the market, you know, both with AI and both with you know, exposure and access to capital.

Shiv Narayanan (16:30.045)

Yes. No, I totally get that. And can you walk us through the different structures that are available to these fund managers at this stage? Like which structures should they consider in different situations? I'm curious like kind of what you're seeing with the different funds that you're working.

Aryeh Landsberg (16:46.156)

Yeah, I mean the structure itself, you know, I think the benefit of NAV lending as a product and our platform in particular is that it's not a prescribed product set, right? You know, we're not a trading desk who only sells loans or, you know, only structures repos or some other financial structure out of a box. Our mandate is to provide flexible capital to well performing private equity. And I should mention it's primarily buyout. But really just managers that have kind of tailwinds that are doing well. And so the way we can build out those solutions is fit for purpose, it's customized in every sense. But generally speaking, and again this is a generalization because each one is different, we're structuring it as a loan. And the borrower for the fund tends to be either the fund, one of its aggregator vehicles, or we could create a funding SPV and attach to different points. We can get as complicated or keep it as simple as is necessary for not just the opportunity set and the need, but for the funds governance documents and for their LP expectations, right? And that historically has been and I'll use that word historically as maybe a bifurcating point. If you go back far enough, I think fund documents just weren't sophisticated enough to contemplate this type of utilization. So they were either silent on it or it was captured under what was designed to be guidance for subscription line financing. And I think as adoption has really rapidly, as we've seen a lot of adoption and uptake from the biggest best managers, you've really seen this percolate through their new fund governance documents. You know, the LP agreements will now generally contemplate fund level guidance. And I should give a hat tip to our colleagues at ILPA, which is the LP Association for the private equity industry. They really put out some guidance that codified best practices for this. And by this I mean for using fund level and portfolio level financing. And I'd say the key takeaways were transparency with LPs and you know being thoughtful about expectations and covenants and loan to value ratios and all the kind of governing aspects of the facilities in a way that LPs felt comfortable with. And so now we see much more streamlined processes. And that allows for I think an optimized and tailored solution, whether it be as simple as the fund taking out a loan or something much more complicated where it's done at the portfolio company but reflective of some broader pool of assets. And so there's really no prescribed limitation on the structure, but from a product type, generally we're talking loans. We certainly have the ability to do them as preferred equity structures or other variations, but from our perspective it's the same solution. You want to be cognizant of the fund ecosystem and you wanna be cognizant of all the other things, tax and timing and the nuance of the transaction.

Shiv Narayanan (20:09.687)

How you mentioned LPs earlier. How much of this is also the funds or GPs trying to return capital to LPs faster? Is that a big driver here at all or is that a completely disconnected thought?

Aryeh Landsberg (20:23.994)

It's not disconnected, but I would say it's been in our experience a very small portion. I think that there was a general notion in the market that funds were taking out NAV facilities and sending capital back to LPs, and LPs were kind of throwing their hands up and saying, Where'd this come from? I didn't ask for this. I, you know, I hired you as the manager to buy companies, get them to perform and sell them for more, and then give me back my money as you know in the timeline we agreed. To the extent we've seen elements of that, it's been sporadic and much more nuanced. Just to give you a stat, I think we've done over 130 of these transactions, which is by far the most in the space. And so I use that just to highlight a fairly large sample set. Over ninety-five percent have been for what we think of as money into the portfolio. That's further investments, it's M&A, it's refinancing, it's new platforms, you know, things that are adding value to the not just the LP, but to each individual portco or what have you. To the smaller percentage, call it three to five percent that has resulted in some portion of distribution has usually been for a really specific purpose, right? And just to give you a clean example, we think of it as something akin to an exit bridge. So that's an asset that's already agreed to an exit, either through a sale process or through some sort of deferred purchase. And where the manager is just saying, Here are your options, you the LP. We could wait a year for this deal to close or six months for the regulatory approval, and then you'll get the, you know, 100% of the closing price. Or we could get you that money sooner. You could redeploy it. And then we'll pay back that loan when the transaction closes. So there's a high degree of certainty of exit and timing and all those things. So I think of it as an exit bridge, but I could see how if an LP wasn't tracking the day to day conversation, they might say, Why have you taken out a loan to pay me and make this distribution? And then when the exit happens, they'll, you know, it'll click. We haven't seen as much demand for that, I think. And maybe it's just because closings have been a little shorter recently and the regulatory approval process is more streamlined than it's been historically. But I wouldn't be surprised if the lower level of liquidity and exits that we've experienced over the past couple of years persists for longer and longer, that LPs might look for some additional form of distributions. The other element I'd highlight is the secondaries market has been really active and fairly robust historically. Obviously that's subject to change and discount levels, but it's been a fairly efficient process. So LPs who want money have the option to sell their stakes. They now they forego their future performance when they do that. And I think that that's an important point to consider. But I think there's been just a lot of secondary liquidity provided with all the capital in that space. And so that's probably reduced the I think LPs are taking it upon themselves to find that liquidity versus expecting the GPs to do it for them. But if that dynamic changes, if that part of the market becomes either capital constrained or if the discounts just become, you know, unattractive, you know, I could certainly see some opportunities and instances where it would be the a better solution to do financing. And we do see that from time to time on the LP side, where an institutional allocator will say, I really don't want to sell these portfolio, you know, these investments, these co investments, this diversified portfolio, but I do have a liquidity need. And so they'll borrow against that value to make further investments, to make an opportunistic acquisition, be it private or public. And so you know there's a complicated interplay with the opportunity set from an investment perspective and the availability of capital and the relative cost of capital.

Shiv Narayanan (24:43.147)

Yeah, yeah, I guess I asked because continuation vehicles are something that we've been talking about with a bunch of guests on the on the podcast and there's been an increase in a demand for that and part of it is getting LPs liquidity. But I guess this is a little bit different in terms of a is a vehicle to and in terms of objectives as well.

Aryeh Landsberg (25:02.574)

I would agree with that sentiment. We've seen a massive proliferation of continuation vehicles. I think it's a permanent part of the exit strategy. But it is incumbent on GPs who have done it to perform. One of the things we've seen is CVs have taken longer than I think they initially hoped to actually get that final exit. You know, they're generally pitched as this is a great asset. We all agree we want to hold it for longer because we think it's worth more, but we understand that its current ownership structure is time limited, right? It's in an older fund and we need to move it somewhere. Some of them though are coming up on their five or seven year legal life and they you know, there really will be a need at some point to achieve an organic exit on those. And in some cases we've been pretty active with more so on multi asset CVs, which are kind of you could think of them a little bit as like clean up solutions or diversified liquidity solutions, but even for single or you know, one, two, or three portfolio companies in a CV to do some accretive M&A at those companies prior to a sale. And I would add to not just being for M&A, but potentially even for refinancing, right? So you asked earlier about why not just use traditional portfolio company leverage. In some cases they have, and one of the gating issues to getting the best sale price is that they're just seen as having too much leverage. And so, you know, fund level NAV to reduce that nominal leverage ratio at a single company can really make it more saleable. You know, it can improve the multiple, and so I think it's that type of flexibility in terms of use of proceeds that works obviously for flagship funds, but it works for continuation vehicles as well.

Shiv Narayanan (26:56.019)

What about on the value creation side? Because I think that's something you touched on earlier. Can you talk about using NAV financing or how you've supported these funds to actually drive more enterprise value for their portfolio?

Aryeh Landsberg (27:10.07)

Yeah, I mean the the traditional use is just, you know, if you're thinking about a strategy or a value creation plan that's predicated on accretive roll ups. And so just to make up some multiples, you know, if a platform is worth ten X and smaller acquisitions are available at six X, right? Using a NAV facility at the fund level to purchase them immediately creates value. Right? You're able to buy something at six and then as part of a holistic portfolio or platform, it's worth 10. And maybe even 11 or 12 if you think about the synergies and the cost savings and the you know the integration and cross-selling capabilities that some you know really savvy sponsors are able to achieve. I think that that's a pretty clean example of creating value just by unlocking this ability to have capital. And not necessarily and at a lower cost of capital than equity from from LPs. And potentially at you know, depending where they are in their scale and how big of a platform, potentially cheaper than fund level debt, or rather than for portfolio level debt that they might get from, you know, a direct lender or from a bank. And so I think that just in terms of like from a strategy basis, like that makes a lot of sense. But even more idiosyncratic, kind of opportunistic opportunities, what we're really seeing develop over the last six or so months, maybe a little longer, maybe twelve months, has been certain public market opportunities where a company is trading, you know, trading poorly and is now an attractive target for a sponsor. And so it can be difficult to put together traditional financing on the fly when you're making a bid and competing against other public sponsors or other public strategics for holding companies from insurance companies from all the potential buyers of public companies, sovereign wealths, et cetera. And you know, for a sponsor that is maybe later in their life and doesn't have the full equity size available in dry powder. Putting together a co-investment syndicate in a competitive environment can be tough. I mean, it creates a lot of value if you can buy an underperforming public company quickly and with a hundred percent cash offer, you know, when they'll have to go to their board and get, you know, approvals and shareholder consents and things. You know, I think those are probably two from the acquisition perspective in terms of operators. You know, some companies just can use more capital to perform better. I think of insurance platforms, right? Where the machine is well oiled, but getting capital into it is expensive and hard. And you know, the alternatives are just buying, you know, buying more ancillary business and cobbling them together. Whereas just giving the platform more capital has a multiplier effect. In some cases there's repositioning, right? You know, there's been a massive capital expenditure from tech focused sponsors to get AI enabled, to reposition, to rebrand, to, you know, spend money on computing, spend money on integration. You know, that money's gotta come from somewhere and if NAV financing is the most flexible and the lowest cost of capital, that's going to create more value than by doing nothing or by pursuing an alternative.

Shiv Narayanan (31:07.646)

Mm-hmm. In those cases, the interesting thing here is that the firm is borrowing against the fund and then using it to fund one of the companies where there's an operational opportunity and actually like pursuing that, whether it's AI or something to to drive more pipeline or growth for the business.

Aryeh Landsberg (31:30.646)

Yeah, I think that that's an accurate summary. That is generally what's being done, but I don't know that I don't think Is that is it happening often? Is it yeah, because it it seems like a strange way to fund a particular asset, if you will.

Shiv Narayanan (31:37.182)

Is that happening often? Because it seems like a strange way to fund a particular asset, if you will.

Aryeh Landsberg (31:45.152)

It depends. I don't have a firm answer because each investment, you know, has its own life cycle and its own performance expectations. So I would say that the base case is never we're gonna buy this, it's not going to work without additional capital coming in, right? That's not usually the situation. It's and when I use the word opportunistic, I don't mean to overuse it, but sometimes something changes in the market and there's a strategic rethink of we didn't think this synergistic business would be available or this investment into a new distribution channel would be our primary driver, but it is. And we need to feed the machine to achieve what is now our most likely path to success. And we see that a lot, and we don't necessarily have that line of sight at the beginning, right? So we talking about structure or reverting back to structure. We often you know, these are generally structured you're positioned as an immediate capital need and you take out a loan and you use it for whatever you were planning on using it for. But sometimes we'll have additional capacity, we'll provide accordions or delay draw mechanics where you know the primary use was to buy something, but the secondary use is well, we could use more capital and we don't want to go back to the table and find a new source of financing. We have this liquidity line on standby. And that certainty allows for kind of operational flexibility from the deal team. We see that a lot. And we've seen that, you know, particularly over the last year, where once folks have deployed NAV, they realize that there's lots of places in their portfolio that would do better with availability of capital. And it might not be the initial platform they thought it would be. And sometimes it is. We bought something, we merged it together, and now one of the competitors that wasn't available is and it's looking to spin off this, you know, this segment. And so it becomes a more holistic, you know, platform buildup quicker than they anticipated. And they'll use their NAV facility or ask for an upsize to help fund what might turn out to be one of their better performing platforms.

Shiv Narayanan (34:04.846)

Right, right. No, that makes total sense. We're coming up on time here, Ari, but if people want to get in touch with you or learn more about 17 Capital, what's the best way to get in touch?

Aryeh Landsberg (34:15.466)

That's a great question. I wish I was tech savvy enough to give them my socials, but you can find me on LinkedIn. You can email me at last name at seventeen capital. We should have a website up. But no, I think 17 Capital is fairly well known in the space for providing this type of capital to the sponsor ecosystem. But if you haven't met us, come find us. We're always happy to talk, you know, to walk talk to case studies and what we've done for the broader PE ecosystem. We think we're gonna be pretty busy because we want our partners to succeed. We want the private equity industry to deliver outsized returns and we want the operators to have the most amount of options as they deliver on their value creation plans.

Shiv Narayanan (35:09.474)

Awesome. Yeah, we'll be sure to link all your social content and your website and everything else in the in the show notes. And with that said, Ari, thanks for coming on and sharing your wisdom. It's a different vehicle that we actually haven't had many episodes on on the podcast. So appreciate coming on and sharing all the insights. And I'm sure it's gonna help a bunch of GPs and operators figure out how to run their firms and their funds. So appreciate you doing this.

Aryeh Landsberg (35:34.262)

I hope so. Thanks so much, Shiv. Thanks for having me.

Shiv Narayanan (35:36.207)

Yeah.