NAV Facility
Definition
A NAV facility, or net asset value loan, is a loan to a private fund secured by the value of the fund's investments, usually through a pledge of the holding company that owns them and of the cash flows they produce, rather than by the investors' uncalled commitments that secure a subscription line. It is used in the second half of a fund's life, when commitments are mostly drawn and the portfolio is the only collateral, and is sized conservatively against a diversified portfolio: loan-to-value ratios of 10 to 25 percent for buyout funds, higher for credit and secondaries funds whose assets are more numerous and more liquid. The proceeds fund follow-on investments the fund can no longer call capital for, refinance portfolio-company debt, bridge a sale that is signed but not closed, or, most controversially, are distributed to investors as an early return of capital that raises the fund's DPI without a realization. Lenders protect themselves with LTV covenants that require paydown if the portfolio's value falls, concentration limits, and cash sweeps from exits, which is what turns a NAV facility into a forced seller in a downturn.
Why it matters
NAV lending grew from a niche into a market estimated in the tens of billions of dollars a year between 2021 and 2024, in the same years that private equity exits slowed and investors began asking for their money back. That is not a coincidence: a NAV facility lets a manager show distributions without selling anything. For an investor it changes what a DPI figure means, puts a lender ahead of the investor's equity in the portfolio, and adds a covenant that can force sales in a downturn, all under a clause in the LPA that may have been drafted to permit short-term borrowing for expenses. The 2024 ILPA guidance exists because many investors discovered their funds had NAV facilities from the quarterly report rather than from a consent request.
Common misconceptions
- •A NAV facility is not a subscription line. It is secured by the portfolio, not by investors' commitments, and it leverages the investments; the two are often discussed together and are different in every way that matters.
- •A NAV-funded distribution is not a realization. DPI rises, but the investors' capital in the fund is unchanged and now sits behind a loan; the distribution is their own money with a coupon.
- •Low LTV is not low risk. At 15 percent LTV a 30 percent fall in portfolio value leaves a 21 percent LTV, but the covenant may be set at 20, and the cure is paying down from exits the fund cannot make in that market.
- •Authorization is not disclosure. A general leverage clause may permit the facility; whether investors were told, and whether the advisory committee consented to distributing the proceeds, is a separate question the ILPA guidance addresses.
Technical details
Worked example: a NAV facility on the cluster's $100 million fund
Year seven: the fund has called $95 million, returned $60 million and holds six companies at a $110 million NAV. Investors have been asking about distributions; exits are slow.
The manager arranges a $20 million NAV facility at 18 percent LTV, SOFR plus 5.5 percent, secured by the holding company, with a 30 percent maximum LTV covenant and a 50 percent cash sweep from exits. It draws $8 million for a follow-on into the strongest company and $12 million for a distribution to investors.
Reported effect: DPI rises from 0.63x to 0.76x; the fund's IRR rises because cash came back earlier. Investors' economic position: $12 million received, $12 million of debt added ahead of their $110 million of equity, interest of about $2 million a year on $20 million now charged to the fund.
Year eight: a downturn cuts the NAV to $75 million. LTV is 27 percent, near the covenant; the lender requires that the next exit repay the facility in full. The manager sells the second-best company at a 20 percent discount to its mark to comply. The distribution that lifted DPI in year seven cost a forced sale in year eight.
How the facility is structured
Borrower: the fund or, more often, an aggregator holding company that owns the portfolio investments, so the lender's security is over the holding company's shares and its distributions from the investments.
Collateral: the eligible portfolio, with concentration limits (no single asset above 20 to 30 percent of the borrowing base), exclusions for distressed or unlisted-and-unvalued positions, and haircuts by asset type.
LTV: initial 10 to 25 percent for buyout; a maximum LTV covenant above which cash is trapped or the loan must be reduced; valuation by the manager quarterly with lender rights to challenge or obtain third-party marks.
Cash sweep: a share of exit proceeds (25 to 100 percent) goes to the lender before investors while the facility is outstanding.
Pricing: SOFR plus 4 to 8 percent for buyout portfolios, less for diversified secondaries and credit; upfront fees; three-to-five-year tenor matched to expected exits.
Recourse: limited to the collateral; investors' uncalled commitments are not pledged unless the facility is a hybrid.
Uses, ranked by how investors receive them
Defensive follow-ons: protecting or growing existing companies when commitments are spent; generally accepted.
Portfolio-company refinancing: replacing expensive asset-level debt with cheaper fund-level debt; accepted with disclosure, though it moves risk from one company to the whole portfolio.
Bridging signed exits: short-term, self-liquidating; accepted.
Fund expenses and management fees late in life: tolerated, watched.
Distributions: the contested use, since it manufactures DPI, adds cost and ranks a lender ahead of investors; ILPA asks for explicit consent and disclosure of the performance effect.
Disclosure and consent
LPA authority: older agreements permit borrowing for short-term needs or up to a percentage of commitments; whether that covers a multi-year NAV facility is the question managers and investors have argued about.
ILPA 2024 guidance: advance disclosure of purpose, size, cost and terms; advisory committee consent where authority is unclear; quarterly reporting of the facility and its effect on returns; no NAV-funded distributions without consent; new LPAs should address NAV borrowing expressly.
Reporting: the facility, its balance and covenants should appear in the fund's financial statements and quarterly letters; a fund's net IRR and DPI should be shown with and without the facility's effect.
Feeders: the master fund's NAV facility leverages the feeder's interest; the platform is the party consulted, if anyone is.
Reading it as an investor
Find the LPA's borrowing clause and whether it contemplates portfolio-secured borrowing after the investment period.
Ask whether the fund has or plans a NAV facility, its size, LTV, covenants, cash sweep and cost.
Ask what the proceeds fund; if distributions, ask for DPI and IRR with and without them.
Ask how a covenant breach is cured and whether the lender can require sales.
Compare with the practice page on margin spirals for the case where valuations fall while the facility is outstanding.
Frequently asked questions
- What is a NAV facility in private equity?
- A loan to the fund itself, backed by the companies the fund owns. Where a subscription line borrows against money investors have promised to pay in, a NAV facility borrows against what the fund already holds. A $500 million fund with a $400 million portfolio might borrow $60 million against it, at 15 percent loan-to-value, to make follow-on investments or to send investors a distribution ahead of exits.
- How is a NAV facility different from a subscription line?
- Collateral, timing and effect. A subscription line is secured by uncalled commitments, used during the investment period, repaid from capital calls, and does not add leverage to the investments. A NAV facility is secured by the portfolio, used after the investment period, repaid from exit proceeds, and does add leverage: investors' equity in the portfolio now sits behind a lender. Hybrid facilities start on the commitment base and migrate to the NAV base as the fund matures.
- What do funds use NAV facilities for?
- Follow-on capital for portfolio companies when the fund's commitments are exhausted; refinancing expensive debt at portfolio companies with cheaper fund-level debt; bridging the gap between a signed sale and its closing; paying fund expenses late in life; and distributions to investors funded by borrowing rather than by exits. The last use, a fund-level dividend recapitalization, is the one investors object to, because it returns their own capital to them with interest attached and improves the manager's DPI and IRR without a sale.
- What LTV do NAV lenders use?
- Low. Buyout fund NAV facilities are typically 10 to 25 percent of the portfolio's net asset value, secondaries and fund-of-funds facilities 20 to 40 percent because their portfolios are more diversified, credit funds higher still. Lenders haircut concentrated positions, exclude companies in distress and impose a maximum LTV covenant (often 30 to 40 percent) whose breach requires paydown or additional collateral, which is the margin-call mechanism.
- What did ILPA say about NAV facilities?
- In July 2024 the Institutional Limited Partners Association published guidance asking managers to disclose NAV facilities to investors before using them, to seek advisory committee consent where the LPA did not clearly authorize them, to report their size, cost, use and effect on performance, and not to use them to fund distributions without explicit investor consent. It followed a period in which many managers had borrowed under general leverage provisions written before NAV lending existed.
- Is a NAV facility bad for investors?
- It depends on what it funds. Borrowing to protect a good company through a follow-on the fund could not otherwise afford can be the best use of the portfolio's value; borrowing to distribute cash and lift DPI while charging investors interest on their own money is not. The mechanical risks are the same either way: the loan ranks ahead of investors' equity, a fall in portfolio value can trigger paydowns that force sales at the worst time, and the interest cost reduces the fund's net return.