NAV Lending: Liquidity Tool or Leverage Trap in Private Markets?

In a recent episode of our Private Credit Perspectives podcast mini-series, we explored an increasingly relevant—and often misunderstood—corner of the market, namely Net Asset Value (NAV) lending/financing: NAV Financing: Unlocking Value or Kicking the Can Down the Road? Listen here

NAV lending is no longer a footnote—it’s a headline. As liquidity pressures ripple through the private markets, Net Asset Value (NAV) lending has moved from the fringes of fund finance to the center of strategic conversations. Once a niche tool for mature funds, NAV lending is now a rapidly expanding market—bridging the liquidity gap between slower exits, constrained fundraising, and rising capital needs.

But as its usage accelerates, so do the questions: What exactly is NAV lending? Who benefits? What risks are building beneath the surface? And could this flexible funding mechanism become a source of systemic stress?

This article builds on that earlier conversation and goes deeper. We’ll examine what NAV lending is, why it's booming now, what risks it introduces, how LPs should evaluate it, and where the credit opportunities lie for sophisticated investors.

What is NAV Lending and How Does It Work at the Fund Level?

NAV lending is a form of fund-level credit where a private fund (typically private equity, private credit, or secondaries) borrows against the net asset value of its existing portfolio of investments. Unlike subscription lines, which are secured by unfunded LP commitments and used early in a fund's life, NAV loans are typically deployed later—once capital is mostly drawn and exits are delayed.

How is it different from other fund finance structures?

NAV lending uses the whole portfolio or select investments as collateral. Loan-to-value (LTV) ratios are typically conservative—10% to 30%, depending on asset quality, diversification, and liquidity. Loans are often non-recourse to LPs but may involve covenants or security over SPVs.

It’s also increasingly being structured on a revolving basis, allowing funds to draw and repay flexibly, mirroring corporate credit lines.

NAV facilities originated in parts of the private funds world and have now spread across various fund strategies. Common types of funds using NAV lending include:

• Private Equity Funds (Buyout/Venture/Growth): Closed-end PE funds often use NAV loans in the mid to late stages of the fund. Reasons include financing:
  • Follow-on investments or add-on acquisitions: in portfolio companies when the fund is fully invested
  • Supporting portfolio companies to avoid selling at an inopportune time (or to refinance expensive asset-level debt), and even
  • Bridging distributions to LPs: for example, to deliver liquidity to investors sooner, which can be useful if those investors will recycle proceeds into the manager’s next fund.

    An example of a private equity fund with a NAV financing

Source: Private Capital Solutions

This allows PE GPs to maximize value and IRR without diluting equity – effectively using leverage at the fund level to boost investor returns once the portfolio is substantially built.

• Private Credit Funds: Private credit or debt funds (which hold loan portfolios) have also been heavy users of NAV facilities. In credit funds, a NAV facility is essentially used as fund-level leverage to amplify returns and increase lending capacity. These funds may arrange a NAV line early in the fund’s life, once they have a base portfolio of loans generating NAV, to continually recycle and originate more loans than equity alone would permit. The NAV loan to a credit fund often looks like an asset-backed credit line: the fund’s loans are pooled as collateral, a borrowing base is calculated with haircuts based on loan quality, and the facility is drawn and repaid as the fund buys or sells loans. Because loan assets produce interest and can be sold on secondary markets, lenders are comfortable with higher advance rates – LTVs for credit fund NAV loans can range from ~50% up to 60–70% for diversified, high-quality portfolios. The strategic goal for credit funds is efficient leverage: NAV borrowing allows them to enhance yield to their investors and deploy more capital (much as a bank might leverage its balance sheet).
  
  

  An example of a private credit fund with a NAV financing

  
  
  

      Source: Private Capital Solutions

• Secondaries Funds (and Fund-of-Funds): Secondaries funds, which buy portfolios of LP interests in other funds or direct secondary stakes, commonly utilize NAV lending as well. In fact, NAV financing was first adopted in secondary and fund-of-funds strategies and private credit funds before becoming more popular in mainstream private equity. Secondaries funds typically hold diversified portfolios of fund interests or companies, which is ideal for NAV lenders since the risk is spread across many assets. They may use NAV loans to bridge acquisitions (acquire secondary stakes using debt and then pay it down as they raise capital or receive distributions), or simply to juice returns by adding leverage to a broad pool of mature assets. Because secondaries investments often have predictable cash flows (distributions from underlying funds), a NAV facility can be structured to be repaid from those incoming distributions. The motive here is similar: increase IRR and flexibility.
  

Why Is NAV Lending Growing in Popularity Now?

NAV lending has surged due to a confluence of market frictions:

1. Banking sector disruptions

The failures of SVB and Credit Suisse in 2023 spurred retrenchment in traditional fund finance. Banks facing tighter regulatory scrutiny have pulled back from balance sheet-intensive lending, especially to alternative assets.

Private credit providers stepped in, often with greater flexibility and at higher yields.

2. The "denominator effect" and exit slowdown

As public market valuations fell and fundraising slowed, many LPs became overexposed to illiquid alternatives. Meanwhile, exit activity in private equity dropped sharply—with 2023 exit value down ~40% YoY.

GPs faced liquidity mismatches: cash was needed for follow-ons and GP-led secondaries, but realizations stalled. NAV loans became a bridge.

3. Need for fund-level flexibility

In a higher-rate world, funds increasingly need working capital to manage:

• Delayed exits
• Support for underperforming assets
• Continuation vehicles or co-investments

NAV lending has become a tool of strategic flexibility, not just emergency cash.

What Are the Benefits of NAV Lending for GPs and LPs?

For General Partners (GPs), NAV loans offer:

• Liquidity without forced sales: Retain assets through value recovery cycles
• Extended investment runway: Avoid distressed exits or down-rounds
• Distribution smoothing: Satisfy LP distributions or fees when liquidity is tight
• IRR optimization: Delay capital calls or back-load distributions to boost net returns

For Limited Partners (LPs):

• Deferred capital calls: Reduces near-term cash drag
• Sustained portfolio momentum: Funds remain active in deploying capital
• Potentially higher returns (if capital is effectively deployed)

But benefits for LPs are indirect—they depend on the transparency, pricing, and discipline with which NAV lending is used.

What Are the Risks or Unintended Consequences?

NAV lending introduces structural and governance challenges:

1. Hidden leverage

Fund-level borrowing may not be clearly disclosed in performance metrics. Combined with sub lines and asset-level debt, the total leverage stack can become opaque—a concern during downturns.

2. Valuation ambiguity

NAVs are manager-assessed and often infrequently updated. Lending against stale or inflated NAVs introduces valuation risk for both lenders and LPs.

In a stress scenario, collateral values may fall faster than the fund can deleverage.

3. Portfolio cross-contamination

NAV loans are often secured by multiple portfolio assets. If one fails, lenders may access proceeds from others—impacting healthy investments and reducing LP recoveries.

4. Covenant breaches and liquidity spirals

NAV loan structures may include financial covenants tied to NAV thresholds. In volatile markets, a rapid NAV drop could trigger technical defaults, forcing asset sales at unfavorable prices.

How Should LPs Evaluate NAV Lending in Due Diligence?

As NAV lending becomes normalized, LPs must elevate their due diligence and monitoring. Key areas include:

• Transparency: Is fund-level borrowing disclosed clearly in quarterly reports? Are terms and covenants outlined?
• Use of proceeds: Is debt being used for value-accretive strategies (e.g., follow-ons), or to support underperforming assets and IRR manipulation?
• Stress-testing: Has the GP run NAV shock scenarios? What happens at a 20–30% drop in portfolio value?
• Leverage policy: What is the fund’s total leverage (including sub lines, NAV, and asset-level debt)?
• Alignment: Are GP incentives aligned with LP interests in how NAV proceeds are used?

NAV lending requires active LP governance—not just post-hoc monitoring.

What Role Will Regulation and Standards Play?

The Institutional Limited Partners Association (ILPA) has issued preliminary guidance to bring discipline to NAV lending:

• Leverage limits: NAV facilities should be included in fund-level leverage calculations
• Disclosure requirements: Use of proceeds, structure, pricing, and covenant terms must be reported to LPs
• Governance frameworks: LPACs should review and approve NAV lending facilities

ILPA has also warned against stacked leverage, where NAV loans are layered on top of sub lines and asset-level credit—arguing this could mask portfolio fragility.

Could NAV lending become systemic? Possibly not in size—but in opacity and interconnectedness, it raises echoes of pre-2008 structured finance.

Where Are the Opportunities for Credit Investors?

For alternative credit managers and allocators, NAV lending is an emerging alpha opportunity:

• Lenders: Private credit funds, secondaries platforms, and a few specialist banks now offer NAV loans at 8–12% yields, secured by diversified portfolios.
• Investors: Allocators can access NAV lending returns via NAV-backed credit funds or bespoke mandates.
• Structures: Some secondaries funds are deploying NAV loans to generate non-correlated returns alongside equity.

Attractive features include:

• Short to medium durations (1–3 years)
• Portfolio-level collateral
• Structured downside protection (LTVs, covenants)

However, diligence is key: investor protections vary widely, and lender underwriting depends heavily on access to accurate portfolio information.

Final Take: Tool or Trap?

NAV lending isn’t inherently risky. Used judiciously, it’s a powerful fund management tool—especially in illiquid, capital-constrained environments. But like all leverage, it amplifies outcomes. And in an opaque corner of the market, that amplification can go unnoticed—until it matters most.

For LPs, NAV lending demands vigilance. For GPs, it demands transparency. For lenders, it offers yield with complexity. And for all parties, it underscores the evolution of private markets into a more interdependent, finance-driven ecosystem.