Private Markets 360° | Episode 46: NAV Finance Demystified: How Strategic Capital is Shaping Private Equity

View Full Transcript

Chris Sparenberg [00:00:00]:

Welcome to Private Markets360, your insider's guide to private investments. Today we're joined by Dane Graham, partner at Seventeen Capital, a firm widely recognized as a pioneer and global leader in strategic financing solutions for private equity investors. Dane joined the firm roughly four years ago and plays a key role in sourcing, underwriting and executing these strategic transactions from the firm's New York Office. With nearly 25 years of experience in finance and more than 20 years across asset management and financial advisory, including senior roles at RBC Capital Markets and Citigroup and early experience with Exxon Mobil and about four years at 17 Capital, Dane has followed the NAV finance market since its earliest days, watching it evolve from a niche solution into a core part of the private markets toolkit. At 17Capital, he operates at the intersection of value creation, liquidity management and long term strategic partnerships, including the firm's relationships with Oaktree and Brookfield. We're excited to explore his perspective on the market's evolution and what's next for private equity investors navigating an increasingly complex landscape. Dane, welcome to Private Markets360. It's great to have you with us today.

 

Chris Sparenberg [00:01:14]:

How are you?

 

Dane Graham [00:01:15]:

Thanks Chris, I'm well and I appreciate you asking and having me on Private Markets360 today. Really look forward to the conversation.

 

Christina McNamara [00:01:23]:

Dane, welcome to the show. 17Capital is often described as the original architect of NAV finance and preferred equity in private markets. For listeners who may know the terms but not know the history, how do you describe what 17Capital does and why it exists today?

 

Dane Graham [00:01:43]:

Sure, I think simply put, 17Capital was built to solve a structural gap in the private market markets. At the time of the founding of the firm, those holding high quality private assets had few alternatives to generate proceeds off of those assets either for further investment or for liquidity, other than to sell, take a discount and forego the upside. So the idea was if a prospective borrower, either a gp, a fund or an lp, had a diversified pool of strong performing buyout assets overseen by a high quality institutionalized manager or managers, then 17 Capital could design an appropriate fit for purpose solution to provide them capital at very measured risk levels. And so the focus has been on strategic financing for performing portfolios, not rescue capital, primarily capital to invest more in the same or similar assets and take advantage of opportunities to further compound value. Today we execute those types of transactions across senior secured loans, unsecured loans and preferred equity structures across the developed markets of North America and Europe.

 

Chris Sparenberg [00:02:56]:

That's great background you've been with 17 Capital for about four years now. Can you tell us what attracted you to the firm specifically and why the timing was important?

 

Dane Graham [00:03:05]:

Yeah, the market was moving from niche to mainstream and I had conviction from similar work in early days at Citigroup with alternative asset managers and believed in the market for a long time. And 17 Capital's reputation as really the OG in the space was a. Which is a term I picked up from my son. And their disciplined track record made them an obvious choice really a firm that's almost the definition of an og with about a decade history operating in the nav finance space before really the next competitor entered the market. So quite a unique position that you don't typically see in this business or in this overall marketplace. But I would say overall it ultimately became the people. As with many human capital businesses, that is generally the key ingredient. And the team at 17 Capital is very oriented around a team based approach, a culture of making decisions, leveraging the collective experience of the team versus an individualized approach or that is either sold or forced onto the team.

 

Dane Graham [00:04:14]:

And we remain small enough to be very nimble and able to move quickly on that team based decision making process. But by far the largest dedicated team that all weigh into and have vast experiences that color and shape the way that we approach the market in net finance.

 

Christina McNamara [00:04:32]:

Now you've spent nearly two decades advising asset managers at Citi and rbc, two of the world's largest global banks. So you had a front row seat really to how asset managers navigate cycles, liquidity, shocks, regulatory shifts. How did that experience shape how you think about capital structures and risk today?

 

Dane Graham [00:04:57]:

Yeah, I did have the benefit of working at one of the first investment banking coverage groups that carved out a portion of the financial institution team to focus on the asset management industry and so fortunately had the opportunity to grow up with the institutionalization of the alternative asset management landscape and work on the first IPOs and take the first alternative asset manager through the ratings agency process, execute the first alternative asset management IPO deal, among other first. And so it was a great opportunity to really see deep into a large number of managers through both M&A and capital markets and see that throughout the cycle that occurred and in particular through the GFC and really get to understand how these platforms are set up, what's unique about the platforms and what's unique about the alternative asset management landscape overall. And importantly, understanding the alignment, any incentives that exist within the GPS, the LPs for these platforms. I also had the opportunity to highlight to me how the capital markets are really set up well to serve these platforms in certain areas of their ecosystem, but not all. And so those early days shined a little bit of a light on the opportunity that NAV finance would have with within these ecosystems. That is just really underserved and it's really filling that gap Today.

 

Chris [00:06:24]:

Another dynamic at play here is made the shift from being an advisor to an investor. Can you tell us what changed most in how you approached these decisions once it became your capital at risk?

 

Dane Graham [00:06:37]:

Yeah, Chris, I would make an important distinction that our founder would say, it's not our capital, it's our limited partner's capital. And that is the mindset that we approach the market with. But the largest difference between those two roles is the incentive structure, an advisory role. The incentive structure is to get things done. You're rewarded for closing a deal, whereas as a principal, you own the outcome. And you are rewarded really once the outcome is achieved years later, and only if it's positive. So. But if you want your role as an advisor to be long standing and valued over time, you need to be thinking similarly about which deals make sense, what the underlying risks are involved, et cetera, et cetera.

 

Dane Graham [00:07:18]:

But ultimately you don't own it after the deal is signed. So as a principal, there's that extra focus on governance, documentation, monitoring, thinking in terms of durability, not just outcomes.

 

Christina McNamara [00:07:32]:

Before your time advising asset managers, you actually started your career at one of the world's largest operating companies, ExxonMobil. Does that operating mindset influence how you evaluate private equity portfolios today?

 

Dane Graham [00:07:49]:

Yeah, Christina, I'd say I spent a lot of time in another operating business as well, a dairy farm, growing up, and then ExxonMobil. And I think what they've taught me is the importance of risk and risk management. I've always been around risk as a function of those organizations. Growing up on a farm, When I was very young, I once took a shortcut through the barnyard to avoid walking through the rain. And I got roughed up by an unhappy heifer and learned quickly that shortcuts have material risk to them, you know, so you always, you kind of always need to do the work at exit on the organization. As a large operating organization is very focused on risks and really to the point where the first page of every monthly and quarterly performance report was incidents, not earnings, not revenue. And I'm sure it's the same today. It was really about incidents.

 

Dane Graham [00:08:42]:

So it was a focus on control. What you control can control, but always have a deep understanding of what you can't control and how it costs, how it can cost you and what the risks are. So both have led me to think longer term and stay focused on repeatable processes while being able to adapt as well.

 

Chris [00:09:02]:

Let's talk about 17 Capital as the OG, a pioneer in the market. The firm was active in that financing long before that became mainstream. Can you take us through a little bit of the history? What did the market look like when the firm first started and how has that evolved?

 

Dane Graham [00:09:18]:

Yeah, like what does a market look like before it is a market? Kind of. You're actually creating it at the start. So that what that meant was really largely translating an idea based on a deep understanding of the private equity ecosystem and what's there and what's lacking and really trying to turn that idea into action and ultimately a market. So there was a very, really very limited awareness of the product. There was a significant amount of education that needed to occur, which was a significant amount of the time of the folks at 17Capital spending both with GPs and LPs to really explain what NAV finance is and how it can be used and how it can be applied to create more value and ultimately kind of driving the proliferation of use cases that exist today. Transactions were very bespoke, very highly structured and really a strong emphasis on trust and long term relationships and alignment within the market and within each individual deal.

 

Christina McNamara [00:10:18]:

If you zoom out a little bit, the private market landscape today looks very different from what it did when you first entered capital. Is more global access points for investors have multiplied. So as you fast forward to today, I'm curious what's changed the most in your view? The sheer demand for private markets, exposure, the sophistication and expectation of buyers or the actual products themselves?

 

Dane Graham [00:10:46]:

Yeah, all three have changed and evolved as you highlight. And with respect to NAV finance in the broader private equity equity market, a demands or adoption has been the biggest change though and has accelerated the most. There are points in the market where borrowers have been forced to explore alternative forms of finance such as during COVID and that has kind of helped accelerate the awareness and ultimately adoption. And then really once utilized, the value creation is quite clear. And so it becomes used again in other areas of the manager's ecosystem, either on another fund or at the management company or vice versa. So there. So what's driving that market? The biggest change is adoption. And that adoption is coming from not only new borrowers entering the market, but also repeat users that have already adopted, that are proliferating the use of NAV throughout their platforms.

 

Dane Graham [00:11:43]:

And gps are now acting more proactive versus reactive. I think it used to Be that no one ever called us for a transaction. We would typically have to always be calling on GPS and hearing and seeing what's happening within their ecosystem and then proposing ideas to help them capitalize on those opportunities. Now the market's grown and adopted to the point where they're aware and we do, they do call us, we do receive inbounds. And so the market's come a long way over that last 18 years with that market.

 

Chris [00:12:14]:

Evolution has also become maybe the discovery of this opportunity and a change in the competitive landscape. Some might even say the market's getting a lot more crowded. Against that backdrop, how does 17Capital maintain its leadership position?

 

Dane Graham [00:12:30]:

Yeah, Chris, we really benefit from a first mover advantage. And I alluded to it as why I joined 17 Capital. It's very unique to be operating in the market for 10 years before really before you see your first competitor. And so having executed 125 transactions, fully exited half of those. We really have unparalleled experience. And borrowers in the market want to work with an organization that has seen it all, that can provide guidance and insights into considerations before they become aware or apparent to the borrower. Ultimately, this is a financing that is opportunistic and is largely to capture value. So borrowers are looking for size, speed and certainty.

 

Dane Graham [00:13:13]:

And those factors really come from experience, not from doing it once or twice. On top of that, it's maintaining the relationship approach, the solutions oriented approach in this market and being very transparent on what you can and are able to do and what fits your capital solutions and what doesn't.

 

Christina McNamara [00:13:31]:

You've mentioned earlier that 17 Capital really has two core products within NAV, GP Solutions and NAV Loans. Can you walk us through the differences between the two and when each makes sense?

 

Dane Graham [00:13:46]:

Yeah, sure. We do provide two main product solutions, if you will, for, for LPs to invest in. And they're really divided between the borrower type. And so we, we think of them all as NAB because that ultimately is the underlying exposure or the vast majority of the underlying exposure that we're underwriting. Those diversified portfolios of private equity buyout exposure. But the two different products, the non dilutive GP solutions is really for the GP or LP as borrower. It's flexible fit for purpose capital used by the GP or partners of the GP to continue to invest more capital behind their business and their own funds, helping them further align themselves with their LPs and drive further growth of the GP at the same time. And so we work with GPS in that manner.

 

Dane Graham [00:14:41]:

We also work with LPs who think similarly to GPS, who have meaningful exposure to the buyout asset class and are seeking to invest further behind strong portfolios or behind their favorite managers. And then we provide a what we call credit, which is the market would refer to as NAV loans, which is generally two primary private equity funds with the purpose to facilitate additional value capture in a non dilutive way, typically through portfolio company M and A and sometimes capital structure optimization, or to facilitate better overall fund management by getting the fund more fully invested, improving fee ratios as well as adding to the nominal return for LPs.

 

Christina McNamara [00:15:28]:

There still seems to be a misconception that NAV finance is only for distressed solutions. How do you push back on that narrative?

 

Dane Graham [00:15:37]:

Yeah, I actually think this misconception is fading pretty fast and maybe that's wishful thinking. But I think as the market continues to adopt it sees more transactions that it be it's becoming very clear to all of those that are utilizing and ultimately seeing it utilized that it's really a tool that's for high quality performing portfolios and for truly institutionalized managers. It's not for distress. It's primarily designed and used to accelerate growth and capture additional value where one of the main feedstocks for accelerating that growth and capturing that value is flexible capital. And again, as the market adopts you can the use cases become much more visible and as the earlier transaction season the value creation is pretty clear in these transactions. So I think as a function of adoption we are seeing the evidence that truly is a misconception and that the tool is really built for. It's built for driving value where there's already been quality performing portfolios that can compound that value over time.

 

Chris [00:16:46]:

Let's talk about the strategic partnership between 17 Capital and Oaktree in Brookfield. Those firms own roughly 50% of the business. Can you take us through how this relationship works in practice?

 

Dane Graham [00:16:59]:

Yeah, Chris. We do have a relationship with the Oaktree Brookfield organization. And it's now been four years since we've created that partnership. And part of the idea of it was to further enhance the 17 Capital brand in the US amongst borrowers, ultimately validate the underwriting process. 17 Capital with the rubber stamp, if you will, from an organization like Oaktree who's made its history within the credit markets and obviously very well known for cred. But the idea of the partnership was to be fully autonomous and continue to operate independently at 17 Capital. So no change to the the investment philosophy, no change to the investment process, no change to the ic but ultimately benefit from the resources of a much broader organization that include underwriting capability, that includes size and scale among a number of other factors. And so it's really one of those unique relationships with a high level of support and network and resources, but without interference.

 

Dane Graham [00:18:06]:

And that was the idea of striking the relationship with Oaktree. And it's been quite a good partnership so far.

 

Christina McNamara [00:18:13]:

Let's talk about operational autonomy a little bit more. Why is it so important, particularly in a specialized market like this?

 

Dane Graham [00:18:22]:

Yeah, the autonomy allows us to continue to move quickly and independently, which is necessary for this market. As I mentioned, the use cases here are typically strategic and so speed and certainty are really paramount to the borrower. It was important to preserve the culture and the underwriting approach, discipline. It's been an 18 year history now of executing. We're really developing the market and executing the way that we have approached it as an organization. And maintaining that was really critical to us and ultimately to our LPs and our borrowers. It's to maintain the GP trust. The, the information stays, you know, with 17Capital, it's not shared more broadly, there are walls in place that protect that.

 

Dane Graham [00:19:08]:

And it's to avoid conflICts of interest. All we do is NAF finance. We don't do anything else. The broader organization has many other solutions, but we think our sole focus on NAF finance is quite unique, especially at our scale. And it is completely void of conflICts of lending at the portfolio company level or other solutions that could present conflICts of interest.

 

Chris [00:19:34]:

That is critically important. If we shift gears a little bit and talk about the current market environment, the trends that we're seeing now across private markets. Can you share your thoughts on some of the macro trends that are driving record demand for NAV finance today and any other observations you have from the market dynamic as it currently exists?

 

Dane Graham [00:19:55]:

Yeah, we do see some things from the current and recent market that has helped accelerate use cases for NAV finance. I think going back a couple years, the spike in rates. Yeah. Drove some. A little bit of a freeze in markets overall with some uncertainty of where that was ultimately going to land. What does it mean for performance, valuation, defaults, other items? And so we've had as a result, a bit of a slower exit environment for an extended period of time within private equity. And private equity managers, if they're holding their assets, waiting for a more opportune time to exit, they can't just sit on their hands. They need to continue to drive value creation within those portfolios.

 

Dane Graham [00:20:41]:

And one of the feedstocks for that value creation is capital. And so now finance can be can provide that. It can help them continue to grow their portfolios and drive that value and ultimately look for a more opportune time to exit. So that is definitely driving use cases at both the fund level to continue to grow those portfolios as well as the manager level as they continue to grow as managers raised for capital but are not seeing the same liquidity themselves for their interest in their own portfolios to reinvest in the newer fund vintages. So there's use cases at multiple levels of the organization as a result. But it's the overall growth of NAV is less about the existing market environment. It's more about the size of the overall market, its growth and the adoption of NAV in particular across the market and just the need for more tools given the size of the market. So we see the buyout market at about 4 trillion of value that's expected to double in the next six or so seven years.

 

Dane Graham [00:21:51]:

And naffinance is just a small portion of that overall market. And our opportunity set has increased about 30% per year over the last five, six years fairly regularly. So we think the, the driver of the market is less the market environment, it's more the adoption. And a little bit of a proof case that was in 2021. We saw pretty substantial step up from, from the prior years and that's a result of higher deal activity in the market. Does present the opportunity to capture more value if you have the capital to be able to do it. So we think it's well suited for the overall market environment. Whatever we're facing over the last couple

 

Christina McNamara [00:22:33]:

of years the backdrop has shifted meaningfully. How are GPs thinking differently about capital solutions today than they were to give years ago?

 

Dane Graham [00:22:47]:

I think gps are continue to grow, platforms continue to grow, the market continues to grow. It kind of ties back into some of what I just shared that they need more tools to be able to better manage the overall portfolios as well as the GP. And I think there's been a number of tools in place and they're very, they've been very well worn at the portfolio company level and select tools at the GP level, but not as many tools at the fund level itself, which is what we're doing with the NAV loans and at the GP for in particular their balance sheets. And so we see gps being more strategic and planned around that, educating themselves on the new tools quite rapidly and then finding the appropriate time in place to, to begin to use them and adopt them. And the general premise of it is when and where it makes sense and to create value. And once they do that with a new tool, they tend to become repeat users of it. And so that's probably the biggest change with respect to how it applies to NAV and GP's thinking around capital solutions over time. I think one of the other larger items that is coming and is actively being thought through is generational transfer and as time passes, how gps are ultimately going to facilitate the rotation of the ownership of the GP from what was a founding generation ultimately to the folks that will be driving it going forward when the founding generation moves on.

 

Dane Graham [00:24:21]:

And that's something that is a large opportunity set ultimately for us and something that the market is actively thinking through and working on.

 

Chris [00:24:28]:

Do you think those factors will lead NAV financing to become or to be seen more as a permanent part of the private markets capital stack?

 

Dane Graham [00:24:37]:

Yeah, we have pretty high conviction around that. We see somewhat similar adoption curves as we saw to the subscription line market a decade ago and how once it began and folks really appreciated what was happening and how it was being used and why it was value creating very quickly adopted it across the market. We think the same is happening within NAV finance mainly because the fundamentals are there, the needs are ultimately there and the solution is built for exactly that. And so we expect that most gps will be users of NAV finance eventually and likely the early adopters will be at an advantage and will probably have captured additional value and have had provided better performance for themselves and for their LPs. And that itself will drive others to adopt as well.

 

Christina McNamara [00:25:29]:

If the last five years have taught us anything, it's that private markets can evolve quickly when capital conditions, regulation and investor expectations shift. So now, looking ahead five years from now, how do you expect this market to look any different? Do you see any structural changes or, or is the biggest shift in the buyer, in who the buyers are and what they demand from managers?

 

Dane Graham [00:25:58]:

Yeah, I think we're going to see, obviously our view is we're going to see a larger market. I think it's going to be more institutionalized market. With adoption continuing to accelerate. I think we'll probably see a little bit more of a uniform or standardized reporting with respect to NAV among the uses, specifically at the, at the fund level as more adopt. And I think there's probably going to be a clear segmentation of providers across the market given just given the overall size of the market and scale and where managers will be best suited to provide these types of solutions. And as we see new entrants into the market I think there's probably going to be a much more widely understood set of best practices that will exist across the marketplace.

 

Chris [00:26:49]:

So, Dane, as we see the market continuing to develop and as we're maybe anticipating some of these best practices to emerge, knowing that you've had so many of these conversations and 17Capital has been involved in this market going back to before it was an actual market, what is the advice you'd give to GPs who are considering NAV finance for the first time? What are the questions they should be asking upfront?

 

Dane Graham [00:27:13]:

I really think there are three questions that GP should ask themselves or three main questions GP should ask themselves when thinking about a NAV financing is one, what is the use case and what are the opportunities that exist that they can capture? Two is what does it really mean to be fit for purpose and in a NAV financing solution? And three is who do they want to work with? What type of lender do they want to work with? On the first one, it is really about are they, are they foregoing opportunities that could be captured and create a lot of value if they just had a different tool or they could move faster and more quickly with higher certainty? NAV provides that and it and it, it avoids having to bend other solutions into place to be able to capture those opportunities in terms of a fit for purpose there. It's a developing market and the idea of an NAV solution should be one that is designed so that the GP can continue to make the decisions around the portfolio that they deem appropriate, whatever the environment that they face, and that the outcome is ultimately within their control and that the NAV facility doesn't force inappropriate decisions on them at the wrong times. And so being fit for purpose and structured that way is an important question that they should ask themselves. Is the solution actually meeting that criteria? And it's an important one for their LPs and then I think it's who do they want to work with as a lender? And NAV is something that is relatively new. It's unlike other lending solutions like portfolio company leverage, which every lender has and every GP has done hundreds of it's typically solutions that folks are doing for the first time. And so working with parties that have the experience and have been through it and seen it all ultimately create that certainty of execution and also what type of conflicts might exist. So is the provider an LP? Does that yet create some level of misconnect versus other LPs within the portfolio or misalignment? Or are they already a lender to the portfolio and what type of conflicts exist there. So I think that's the other thing for them to keep in mind and ask themselves about whether or not those those conflicts are manageable.

 

Christina McNamara [00:29:31]:

For young professionals looking to build a career in this space, what skills or experiences matter the most and what advice would you give them?

 

Dane Graham [00:29:41]:

Yeah, we've got a number of them and we are generally looking for talented folks that have really a strong understanding of the private equity market. Ecosystem of private equity portfolios we'll understand companies from both a valuation and a credit perspective are creative thinkers because all of these transactions are bespoke and you're trying to design the best solution. Ultimately we look for folks with a team approach that like solving puzzles, if you will, together as a team as opposed to maybe more individually. But I'd also say kind of a key and very different from other types of lending is a bit of a resilient approach. You have to be willing to go out and create the solution and know that you may have a number of conversations, a number of great ideas that ultimately don't materialize, and you need to continue to go out and seek those opportunities. It's very different from expecting to review opportunities that come across your desk because the financing solution is by definition necessary and so it leans more to folks that are, I think, a little bit more ambitious in terms of going out and trying to create an opportunity themselves.

 

Christina McNamara [00:31:03]:

Thank you all for joining us for this episode of Private Markets360, where we had the pleasure of hearing Dane Graham's insights on the evolution of strategic financing in private markets. Dane's channel journey from advising global financial institutions to investing at one of the original pioneers of NAV finance offers a unique perspective on how capital solutions have matured into essential tools for long term value creation. We explored 17 Capital's role as an early architect of GP solutions and NAV loans, the misconceptions surrounding these strategies, and how thoughtful flexible capital can help GPS navigate liquidity growth and portfolio optimization in a shifting market environment. Dean also shared valuable perspectives on market Trends, alignment with LPs and what the next chapter of private markets may hold. If you enjoyed this episode, please subscribe to Private Markets360 and leave us a review. Join us next time as we continue to explore the world of private markets and bring you more insights from industry leaders. Until then, keep thinking critically and exploring the opportunities that lie ahead in private markets.