NAV Facilities
Definition
NAV (Net Asset Value) facilities are credit lines extended to private equity and credit funds, secured by the fund's underlying portfolio rather than individual assets. Advance rates typically range from 15-25% of fund NAV, with quarterly mark-to-market valuations and margin call provisions. Pricing is L+200 to L+350, significantly lower than traditional fund-level leverage because lenders look through to diversified portfolios of sponsor-backed companies or credit instruments.
Why it matters
NAV facilities create dangerous feedback loops during market stress. When portfolio valuations decline, lenders issue margin calls requiring funds to post additional collateral or repay debt. If the fund can't meet calls, forced asset sales occur—driving valuations lower and triggering more margin calls. During March 2020, NAV facilities caused cascading forced selling in CLO equity and private credit secondaries. Funds that avoided NAV facilities preserved capital, while leveraged funds experienced permanent impairment. The key risk: NAV facilities transform mark-to-market paper losses into realized losses through forced deleveraging.
Common misconceptions
- •NAV facilities are NOT simply 'borrowing against your portfolio.' The leverage is secured by fund-level interests, creating structural subordination to portfolio company debt.
- •Margin calls are not discretionary—they're contractual obligations triggered by NAV declines, typically with 5-10 business day cure periods.
- •NAV facilities cannot be easily refinanced during stress. When valuations are falling, replacement lenders demand material deleveraging or refuse to provide facilities entirely.
Technical details
Structural mechanics and advance rates
Typical NAV facility terms: 15-25% advance rate on fund NAV (i.e., $100M NAV supports $15-25M facility), quarterly NAV recalculation by fund administrator, margin maintenance covenant requiring advance rate maintenance after valuation changes, and cure periods of 5-10 business days for margin calls.
Advance rate varies by fund type: PE funds with public company exposure get 20-25%, credit funds with liquid loans get 20-25%, venture funds and illiquid strategies get 10-15%. Lenders discount troubled positions (CCC-rated debt, impaired equity) at 0-50% of reported NAV.
Margin call mechanics and forced selling
Example scenario: Fund has $100M NAV, $20M NAV facility (20% advance rate). Portfolio marks down 15% to $85M NAV. Permitted borrowing under 20% advance rate is now $17M. Fund faces $3M margin call—must post cash, pledge additional assets, or repay debt.
If fund can't cure: Lender can force asset sales or seize collateral (fund-level interests). Asset sales in stressed markets realize 60-80% of mark-to-market values, creating additional NAV decline and potential subsequent margin calls.
Feedback loop: NAV decline → margin call → forced selling → lower sale prices → further NAV decline → more margin calls. This spiral was visible in March 2020 CLO equity secondary markets.
Uses and strategic considerations
Appropriate uses: Bridge financing for committed follow-on investments before portfolio exits, management fee and expense coverage, opportunistic deployment when seeing compelling dislocations. NAV facilities can enhance IRR if used prudently.
Dangerous uses: Permanent leverage to boost returns, funding distributions to LPs before underlying exits, doubling down on positions during drawdowns. These uses amplify downside risk without commensurate upside.
Best practice: Many sophisticated GPs either avoid NAV facilities entirely or maintain strict LTV limits (10-15% max) and require board approval for drawdowns. Some GPs prohibit NAV facilities in fund agreements to protect LP interests.