All the Rage in Private Equity: Mortgaging the Fund

At the Milken Institute’s Global Conference this week, a little-known risky financial tool became the subject of a hot debate among Wall Street titans.

Many private equity firms have quietly begun mortgaging their investment funds, piling leverage upon leverage. In other words, they’re taking out loans against the businesses they’ve already taken out loans to buy.

At a time when dealmakers are desperate to raise new cash after the boom of the pandemic era, this mechanism — known as a net asset value loan — is allowing them to do it overnight.

More P.E. firms are using the tool as they set out to raise their next funds, especially those confronting a hurdle during a slow period for dealmaking: They have yet to return cash to the limited partners they tapped for their last round.

“We’re having unprecedented pressure from our L.P.s to send them cash,” Jonathan Sokoloff, the founder Leonard Green, said onstage at the Milken conference. “We’ll send you cash any way we can.”

The big debate at Milken was whether private equity firms that are solving this problem with N.A.V.s are risking their future to buy some time with investors.