At a time when sponsors are holding onto assets longer than expected, margin loans in private markets are providing a valuable channel of liquidity
Drawn out hold periods and low exit volumes have put liquidity at a premium for private market portfolio companies—margin loans are helping to ease that pressure.
Margin lending, where investors can borrow cash against the value of securities, has long been a feature of public capital markets. The margin loans are secured against the value of eligible securities, allowing traders and investors to acquire a greater number of shares than they would otherwise be able to purchase or to gain liquidity against existing positions. The securities serve as collateral for lenders, who can call in the loan (or make a margin call) if the borrower fails to maintain an agreed loan-to-value (LTV) ratio.
Margin loans involving publicly listed securities are highly regulated and require daily mark-to-market pricing to calculate LTVs. Historically, this has made margin loan financing an awkward fit for illiquid private markets portfolios. But the rapid growth of the private markets fund finance industry (particularly the provision of net asset value (NAV) lending) has fostered the evolution of facilities similar to margin loans for investors in privately-owned businesses.
The rise of private margin loans
Interest in “private” margin loans has grown as fund managers seek new ways to ease distribution bottlenecks that have constrained cash flows to investors. According to Bain & Co., private markets distributions as a percentage of NAV have fallen from an average of 29% between 2014-17 to 11% in 2024, the lowest rate in a decade.
Private margin loans have helped ease the pressure by unlocking debt capital, which fund managers can use to finance acquisitions or return capital to investors. The loans are secured against the equity stakes that the managers hold in the relevant portfolio companies.
Innovative lenders have been able to provide these private margin loans by combining elements of traditional margin loans with those of NAV portfolio loans. This allows them to provide capital against single assets or concentrated portfolios.
When determining the valuation of the assets against which the loan is collateralized and when setting the LTV thresholds that trigger margin calls, lenders have adopted a range of approaches.
Lenders may base the LTV ratios on the trading price of a company’s public debt, using this as a stand-in to establish the business’s equity value. This approach aligns with the mark-to-market frameworks used for mainstream margin loans but involve detailed negotiations between the lender and borrower. For instance, the parties must determine what happens if the debt used to set an equity valuation is refinanced, or additional layers of junior debt are added to the capital structure in a way that could distort the LTV ratio. If capital structures do change materially, replacement reference assets can be introduced.
Other mechanisms used in private margin loans that mimic mark-to-market pricing are 409A valuations. These are calculated independently on a quarterly basis and typically conducted for tax purposes by companies (often in the technology industry) that issue stock options to employees.
Lenders can also base LTV ratios on the NAV valuations that fund managers produce when reporting to their investors.
In both the 409A and fund manager valuation approaches, lenders will seek protections through dispute rights. For example, if a lender believes the 409A valuation or manager’s NAV calculations overvalue the pledged shares, the lender has the option to dispute the calculations and seek an independent third-party valuation of the collateralized assets. If the discrepancy between the 409A valuation or manager’s NAV valuation exceeds an agreed threshold—for example, 5%-10%—the borrower is required to recalculate the LTV based on the third-party valuation to determine if the trigger for a margin call has been exceeded.
Claiming cash against collateral
Most private margin loans are structured around single assets or highly concentrated portfolios, enabling a margin call mechanism similar to traditional margin loans rather than the cash sweep mechanism favored in fund NAV loans. This gives lenders the right to immediate payment to maintain the required LTV ratios.
For margin loans to sponsors, the margin loan will typically sit at a vehicle below fund level, and whether the lenders have access to credit support from the fund in the form of a guaranty or equity commitment letter should a margin call arise is a matter for negotiation.
When it comes to enforcement, private margin loans also bring additional layers of complexity. In a traditional margin loan, a lender who takes ownership of public shares following a margin call can simply sell these shares in public markets. By contrast, selling private company collateral takes longer and could also be subject to change-of-control provisions and third-party consent requirements, depending on the asset’s debt agreements and regulatory restrictions. Clarity on all these provisions should be carefully negotiated so that lenders can, where necessary, effectively enforce their rights.
A nascent market
The market for private margin loans is in the early stages of development. To date, there have been few, if any, collateral calls or enforcement actions.
However, amid macroeconomic uncertainty and delays to the much-anticipated reopening of the exit market, the tailwinds driving the growth of private margin loans remain strong.
Interest from sponsors is growing, as many are still holding on to assets that they would rather not sell in the currently volatile environment. They are looking for ways to secure additional liquidity against those assets to fund follow-on investments and support their funds. Given these conditions, private margin loans are poised to become an increasingly popular financing option.
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