NAV facility / net asset value lending

A NAV facility (net asset value facility) is a credit facility provided to a private fund, secured against the value of the fund's existing investment portfolio rather than against unfunded LP commitments. The lender assesses the collateral value by reference to the fund's net asset value, from which a loan-to-value ratio is applied to determine the maximum borrowing amount.

NAV facilities are typically used by funds in the later stages of their lifecycle, when LP commitments are largely drawn and the portfolio of investments is the primary source of borrowing capacity.

How it works

The lender calculates the borrowing base by applying a loan-to-value (LTV) ratio to the fund's NAV, after applying haircuts to individual positions based on their liquidity profile, concentration, and asset type. A fund with a EUR 300 million NAV and a 25% advance rate would have a maximum borrowing capacity of EUR 75 million. The advance rate and haircuts are renegotiated periodically and are sensitive to portfolio quality: write-downs in the underlying portfolio reduce the collateral value and therefore the available facility.

Unlike a subscription line, which is repaid by LP capital calls and rotates naturally as the fund calls and deploys capital, a NAV facility is repaid from portfolio exits, refinancings, or dividends from portfolio companies. The repayment profile is less predictable, because it depends on realisation events that may be delayed by market conditions.

NAV facilities are used for several purposes:

Management fee and expense financing: In the late stages of a fund's life, when most LP commitments are drawn, a NAV facility provides liquidity for ongoing fund expenses without requiring a capital call.

Portfolio company support: The fund may use NAV facility proceeds to inject additional equity or debt into a struggling portfolio company that needs capital but for which a new equity call would be difficult to justify or time-consuming to execute.

GP-led secondary and continuation vehicle transactions: NAV facilities are frequently used in GP-led secondary processes, where the fund needs to provide liquidity to existing LPs who want to exit while retaining the portfolio for future appreciation. The NAV facility bridges the LP exit payment before the continuation vehicle's new LP commitments are drawn.

Distribution financing: In some structures, NAV facilities are used to fund distributions to LPs ahead of portfolio realisations. This is sometimes called a "dividend recapitalisation" at the fund level. It allows LPs to receive early cash returns while the portfolio continues to develop. This use of NAV facilities is more controversial and is viewed by some LPs as increasing leverage risk without generating incremental portfolio returns.

For fund administrators, NAV facilities require specific operational handling. The outstanding balance must be tracked as a fund liability, interest must be accrued daily, and the borrowing base must be recalculated each time the portfolio is revalued. The facility agreement will typically include periodic reporting requirements: the fund administrator must provide the lender with updated NAV calculations and portfolio valuations at defined intervals.

The NAV calculation used for the facility is typically the same ABOR-derived NAV used for LP reporting, though the lender may apply its own adjustments or require third-party valuation support for illiquid positions. Discrepancies between the fund's own NAV and the lender's collateral value assessment must be reconciled.

Worked example

Ashford Capital Partners III, a EUR 450 million mid-market private equity fund at year seven of a ten-year fund life, has EUR 420 million of its LP commitments drawn. Its remaining portfolio of eight investments has a combined carrying value (NAV) of EUR 340 million.

The fund secures a EUR 55 million NAV facility from a bank, based on a 20% advance rate applied to a lender-adjusted portfolio value of EUR 275 million (after the bank applies haircuts to three less liquid positions). The facility carries interest of EURIBOR + 3.8% per annum.

The fund uses EUR 30 million of the facility to fund a tuck-in acquisition by one portfolio company (Meridian Packaging) that would enhance its value ahead of a planned sale process. The remaining EUR 25 million is drawn to fund a partial distribution to LPs who wish to receive early liquidity ahead of the portfolio exit cycle.

Twelve months later, Meridian Packaging is sold, generating EUR 64 million of proceeds. After repaying EUR 31.2 million to the NAV facility (EUR 30 million principal plus EUR 1.2 million of accrued interest), EUR 32.8 million flows to the fund as distributable proceeds from the Meridian exit.

The fund administrator tracks the NAV facility balance as a liability throughout, accruing interest daily and reconciling the facility against the bank's utilisation statements.

Frequently asked questions

What is the difference between a NAV facility and a subscription line? A subscription line is secured against unfunded LP commitments and is typically used in the early to mid-life of a fund, when capital is still being called and deployed. A NAV facility is secured against the existing portfolio and is used in the later stages of a fund's life. Subscription lines are repaid by LP capital calls; NAV facilities are repaid by portfolio exits or cash flow from portfolio companies. Both are fund-level borrowings, but the collateral, the lifecycle stage, and the repayment profile differ.

Is NAV lending considered controversial in private equity? NAV lending has attracted significant scrutiny from LPs and regulators, particularly its use for distribution financing. Critics argue that borrowing against the portfolio to pay distributions to LPs increases leverage risk, creates a complexity that makes it harder for LPs to assess true performance, and may obscure a fund manager's inability to generate returns through portfolio exits. Proponents argue that NAV facilities provide valuable flexibility in managing a portfolio through a lifecycle that does not always align with LP expectations. LPs are increasingly requesting disclosure of NAV facility terms and usage in fund reporting.

How does a NAV facility affect a fund's reported performance metrics? NAV facilities create leverage in the fund's capital structure, which can enhance equity returns if the portfolio generates returns exceeding the cost of borrowing, but amplifies losses if the portfolio underperforms. The facility also reduces the NAV available to LPs by the outstanding borrowing, which affects total value metrics. If the facility is used to fund distributions before exit proceeds are received, the distributions improve reported DPI (distributions to paid-in capital) without reflecting an actual portfolio realisation.

What happens to a NAV facility if the fund's portfolio declines significantly in value? A significant decline in portfolio NAV reduces the collateral value against which the facility is secured. If the outstanding facility balance exceeds the borrowing base (which is recalculated based on the reduced NAV), the fund faces a borrowing base deficiency, which typically requires either partial repayment of the facility or posting additional collateral. In severe cases, the lender may accelerate the facility or require mandatory sale of portfolio assets. These scenarios can force the fund manager to make sub-optimal exit decisions under financial pressure.

What reporting obligations does a NAV facility create for fund administrators? NAV facility agreements typically require the fund administrator to provide the lender with regular (monthly or quarterly) portfolio valuations, NAV calculations, and borrowing base certificates. The administrator must also notify the lender of material events such as portfolio write-downs, portfolio company defaults, or significant capital structure changes. The borrowing base certificate, which reconciles the portfolio valuation to the available facility, is a critical compliance deliverable that the administrator must prepare and deliver on schedule.

Related terms

Subscription line / capital call facility, NAV, Distribution, Golden copy / ABOR, Margin call (private credit fund context), Capital call

Related pages

NAV facilities in private equity: what fund administrators need to know, Swelv for fund administrators