NAV Financing

What is NAV financing?

NAV financing, also called a NAV facility or NAV lending, is fund-level financing secured against the net asset value of a private equity fund's portfolio rather than against investors' uncalled commitments. The borrower is usually the fund or a special purpose vehicle, so the cost and repayment affect limited partners as a group.

In private equity, NAV financing is a credit facility arranged at fund level and secured on the value of the fund's investments (its net asset value), sometimes with additional security over those assets or the holding vehicles that own them. The borrower is typically the fund or a special purpose vehicle in the fund structure, not the individual limited partners. Some NAV-based facilities are structured as preferred equity rather than senior debt, so the instrument is not always a loan.

The facility can be used, depending on the facility documents and what the limited partnership agreement allows, to support portfolio companies, fund add-on acquisitions, bridge a timing gap, or, in some cases, pay a distribution to investors without selling assets or calling more capital.

How it works

A lender or financing provider agrees to advance an amount sized off the fund's reported NAV, usually at a loan-to-value or similar limit and with covenants tied to valuations, concentration, liquidity and default. As the portfolio is realised, the facility is typically repaid from exit proceeds, or refinanced, rather than from fresh capital calls, although the documents can provide for calls in a default or to cure a breach.

Because the security is the portfolio's marked value, the financier's risk, and the fund's headroom, move with those valuations. A write-down can tighten covenants or force a repayment even if no exit has occurred. NAV-based facilities often cost more than subscription lines.

NAV facilities versus subscription line facilities

A subscription line (or capital call facility) is secured against the uncalled commitments of the limited partners. It is most often used early in a fund's life, to bridge the period between making an investment and calling capital from investors, and it shrinks as commitments are drawn.

A NAV facility is secured against the portfolio that has already been built. It is more common later in a fund's life, when uncalled capital is lower and the assets themselves can support borrowing.

The two can exist in the same fund at different times, and in some structures they can overlap or be hybridised, but they are not the same instrument: the collateral, the typical use, and the point in the fund cycle all differ.

Why general partners use it

General partners may use NAV financing to give a portfolio company more time or capital without a sale, to complete an add-on, to avoid or defer a capital call, or to make a cash distribution to limited partners while exits are slow. Used carefully, it can be a liquidity tool. Used to support distributions or to stretch holding periods, it changes the fund's risk, cost of capital and the timing of cash to LPs.

Risks and considerations for family offices as LPs

Family offices that invest as limited partners should treat NAV financing as a change to the fund's leverage and cash-flow profile, not as a back-office detail.

Points to check:

• Permission and disclosure. Does the limited partnership agreement allow fund-level borrowing or preferred-equity financing of this kind, is there a cap, and is the facility reported clearly to LPs?

• Use of proceeds. Is the facility funding the portfolio, or is it being used to pay distributions? The latter can raise DPI in the short term without an exit.

• Cost. Interest, fees and preferred-equity costs reduce the proceeds ultimately available to LPs.

• Priority. Financing providers sit ahead of LP equity. In a downturn, repayment of the facility comes before residual value is paid out.

• Valuation risk. The borrowing base is NAV, which is a mark. If marks prove optimistic, the fund may have borrowed more than the assets can comfortably support.

• Alignment with the original underwrite. Additional leverage, longer hold periods or delayed calls can change the risk the family office thought it was taking.

• Cross-collateralisation and default. A problem in one part of the portfolio can tighten the facility for the whole fund.

None of this makes NAV financing inherently inappropriate. It does mean a family office should ask how much is drawn, on what terms, for what purpose, and how it flows through performance figures such as DPI, TVPI and IRR.

Further Reading & Resources

• ILPA Guidance on NAV Facilities (2024)

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