A net asset value facility is a fund-level loan secured by the value and cash flows of a fund’s portfolio, not by investors’ unfunded commitments. The lender underwrites the portfolio’s NAV and realizations, rather than the ability to call capital. In the European mid-market, you can think of funds of roughly €0.5–€5.0 billion and portfolio companies below €1.0 billion enterprise value.
In plain terms, NAV financing converts a diversified portfolio’s expected distributions into usable capital today. The payoff is speed and flexibility without forced asset sales. The trade-off is higher cost and tighter cash controls than classic commitment-backed lines.
Why NAV financing rose – and when it fits
NAV financing moved from niche to common as distributions slowed and exits took longer. Sponsors used these lines to support follow-ons, refinance asset-level debt, bridge to GP-led processes, and smooth LP distributions. Banks still participate, but private credit funds and specialist NAV lenders increasingly set the pace and the terms. The shift has been most visible since 2023 as leverage markets repriced and sponsors favored non-dilutive liquidity over forced sales.
As a quick fit test, use a three-question screen: Why now, how is the facility serviced, and what is the exit path? If follow-on capital compounds value soon, recurring cash flow can comfortably cover interest, and credible take-out routes exist within the facility tenor, a NAV line can be an efficient solution.
Core structures – what counts as a NAV facility
- Pure NAV: Secured by pledges over holding entities and assignments of distribution rights.
- Hybrid: Combines NAV collateral with recourse to unfunded commitments to lift advance rates or broaden the collateral pool.
- Asset-backed holdco loans: Secured against specific SPVs rather than the wider portfolio.
- Preferred equity-style: No hard covenants, pay cash or PIK, sit ahead in distributions but are not debt.
How NAV loans work in practice
Borrower setup isolates risk
The borrower is either the fund, a ring-fenced SPV within the structure, or an aggregator partnership. The structure uses limited recourse language, separate bank accounts, and a simple corporate purpose to isolate risk from the broader fund.
Collateral follows cash and control
Security typically sits over shares in holding SPVs, distribution rights, and pledged collection accounts. In private credit funds, lenders can also take security over loan receivables where documents allow it. Lenders rarely take direct security over operating company shares if consents block it, so the holdco layer becomes the practical enforcement point.
Borrowing base keeps capacity honest
Lenders apply advance rates to eligible NAV, filtered by asset type, jurisdiction, performance, and concentration. Haircuts hit cyclical, illiquid, or stressed assets. Re-determinations adjust the base to reflect movements in value and portfolio mix. In practice, eligibility rules and haircuts do the heavy lifting.
Cash waterfalls protect repayment
Priority of payments routes cash first to fees and interest, then to amortization and sweeps when tests trip, with residuals to the borrower. Common triggers include LTV breaches, distribution-to-interest cover failures, diversification tests, NAV declines, material portfolio defaults, and fund key-person events. Triggers often flip cash dominion and increase sweeps to 50–100% until the loan cures.
Intercreditor sets true seniority
Where subscription lines exist, they sit senior, with capital call accounts under their control. The NAV lender takes second-ranking security where relevant, observes standstill periods, and turns over proceeds per the agreement. Economics follow that priority.
Legal architecture you need in Europe
European mid-market funds often sit in Luxembourg SCSp or SICAV-RAIF vehicles, Irish ILPs, UK partnerships, or Channel Islands partnerships. Security follows the law of the pledged shares and bank accounts: Luxembourg law for Lux stacks, English law for UK accounts and receivables, and Jersey or Guernsey law for Channel Islands entities. These regimes support out-of-court or expedited enforcement. Facility agreements and intercreditors often run under English law, with disputes heard in English courts or arbitration when the stack is cross-border.
LPAs, consents, and cash control
Many LPAs cap borrowing, restrict pledges, or limit tenor. Sponsors obtain LPAC approvals or waivers to align borrowing limits, facility purpose, and the grant of security over distribution rights. The cleaner the LPA and consent mechanics, the faster the close.
Operationally, cash control and ring-fencing matter. Use limited recourse and non-petition provisions, appoint independent directors for SPVs where expected, keep separate pledged collection accounts and avoid commingling, and put ACAs in place with springing control. Always test flip mechanics with a dry run to prove funds flow and operational certainty.
Economics – pricing, fees, advance rates
Pricing tracks collateral quality, concentration, sponsor track record, and intercreditor subordination. Mid-market coupons often run from mid-single digits to low double digits over base, with PIK toggles when cash is tight. Upfront fees typically sit at 50–200 bps; unused fees at 25–75 bps; and soft call or make-whole features protect lender returns for 6–18 months.
- Private equity portfolios: 10–30% of eligible NAV is common.
- Private credit portfolios: 20–40% of eligible par or fair value when eligibility rules protect asset quality and yield.
Here is a simple illustration. Assume fund NAV of €1,000 million, with €800 million eligible. At a 25% advance rate, an initial €200 million facility supports a €150 million draw. At a 5.5% margin over a 3.5% 3-month EURIBOR with a 1.0% floor, the cash-pay rate is 9.0% annualized. Quarterly interest on €150 million is €3.375 million. If distributions lag and an LTV trigger hits, a 50% sweep of excess distributions reduces the loan until tests cure.
Covenants, hedging, and reporting
Lenders favor straightforward covenant sets that signal early. Maximum LTV often runs 30–40 percent. Minimum interest coverage might require last twelve months portfolio cash to interest of at least 2.0x. Concentration caps typically set the largest asset at or below 25–35 percent of eligible NAV. Where assets and the facility differ by currency, lenders require hedging or apply FX haircuts. Interest rate hedging may be mandatory for floating base rates to lock cost certainty.
Documentation maps to the cash and controls. Facility agreements cover economics, covenants, information rights, and defaults. Security documents include share pledges, account charges, and assignments of receivables and intra-group loans. Intercreditors coordinate with commitment-backed lines, where standstill and turnover provisions are the pressure points. LP consents authorize borrowing and security. Account control agreements apply springing control on triggers. Valuation policy letters and reporting side letters lock frequency, methodology, third-party rights, and auditor access. Opinions cover capacity, perfection, and enforceability. Closing deliverables include constitutions, KYC/AML, collateral schedules, certificates, and fee evidence.
Information undertakings are tight because trend data reduces downside surprises. Lenders expect monthly or quarterly NAV reporting, asset-level KPIs, distribution forecasts, and covenant headroom updates. Quick notice of material events gives risk lead time.
Accounting, regulatory, and tax essentials
Under IFRS, the fund books the NAV facility as a financial liability at amortized cost with interest recognized using the effective interest method. IFRS 7 drives maturity analysis, covenant disclosure, and rate sensitivity. Investment entities under IFRS 10 do not consolidate portfolio companies but may consolidate financing SPVs that are not investment entities. Under US GAAP, investment companies carry the loan at amortized cost in ASC 946, while VIE assessments for collateral SPVs are standard but typically avoid consolidation for lenders.
Lenders under IFRS 9 apply expected credit loss models, where movement from Stage 1 to Stage 2 often follows drops in eligible NAV or trigger breaches. Collateral-dependent measurement and transparent disclosure of inputs matter for capital impact.
Regulatory reporting under AIFMD and AIFMD II includes leverage and liquidity metrics. Loan-originating funds face added governance rules, but there is no Europe-wide ban on NAV borrowing for closed-ended AIFs. KYC/AML, sanctions screening, beneficial ownership registers, and GDPR-compliant data sharing are table stakes.
Tax planning keeps service capacity intact. Interest deductibility is bounded by ATAD 30 percent EBITDA rules and local regimes. Luxembourg typically has no withholding on arm’s length interest and well-tested interest limitation and anti-hybrid frameworks. The UK’s 20 percent withholding on yearly interest requires exemptions or treaty relief where relevant. Other EU jurisdictions have local withholding and barrier rules that can affect upstream flows, so lenders model net-of-tax distributions and often seek gross-up provisions. Transfer pricing matters when borrower SPVs on-lend or pool cash.
Key risks and how to mitigate them
- Valuation discipline: Overstated NAV inflates capacity. Haircuts, third-party checks, and distribution tests counter this.
- Correlation and concentration: Sector or regional overlap can compress outcomes. Caps and dynamic haircuts preserve downside protection.
- Structural subordination: Commitment-backed lines control calls. Intercreditor terms on standstill, turnover, and cures are core economics.
- Cash control: Weak ACAs or untested bank processes create leakage. Springing control, account mapping, and dry runs fix this operational risk.
- Transfer restrictions: Portfolio consents can delay enforcement. Focus security at holdco and pre-clear consent paths to save time.
- GP continuity: Key-person events matter. Tie facilities to LPA key-person and change-of-control events with step-in reporting rights.
- Reinvestment creep: New assets outside eligibility add volatility. Use negative pledge concepts, clean baskets, and eligibility cures.
- FX exposure: Multi-currency NAV vs. euro facilities erode headroom. Hedge or haircut in the base for LTV stability.
- Private credit drift: Non-accruals and recoveries drive outcomes. Tight eligibility criteria and fast loan-level reporting help early detection.
- Enforcement reality: Buyers thin out in stress. Plan for appropriation or private sale at SPV level and pre-clear change-of-control needs.
Comparisons and use cases
- Subscription credit facilities: Cheapest and senior, but limited to commitments and short tenor. NAV extends liquidity closer to asset value at higher cost and with asset risk. See an overview of subscription credit facilities for contrasts.
- Preferred equity: More flexible and typically covenant-light, but pricier and more dilutive to distributions. It helps when LPA leverage caps bind or operational flexibility matters most.
- Asset-level holdco loans: Higher advance rates for specific assets, but they require consents and can reduce exit flexibility.
- GP facilities: Fine for management fee needs; too small for portfolio-level actions.
- Continuation vehicles: Structural alternative to liquidity; NAV can bridge to a GP-led process when timing the market.
A quick way to frame alternatives is to map them in the capital stack. NAV sits between commitment-backed lines and true asset-level financing. At the top end, holdco PIK notes can layer incremental capital for offense, while below that, second-lien loans target single-asset risk with higher advance but tighter controls.
NAV wins where follow-on capital compounds value soon, the portfolio is diversified, and the sponsor needs speed without running a full secondary process. Preferred equity wins when hard covenants would limit day-to-day decisions. For deeper mechanics of NAV financing, compare lender expectations on triggers, valuation frequency, and cash dominion.
Implementation timeline and owners
A practical mid-market cadence is 6–12 weeks from go to funding. Early preparation saves time and pricing slippage.
- Weeks 0–1: Decide to proceed, sound out lenders, assemble asset pack, clear LPA constraints.
- Weeks 2–4: Term sheet, desktop diligence on portfolio and cash flows, identify collateral path and consents, scope hedging.
- Weeks 4–8: Negotiate facility, security, intercreditor, prepare ACAs, settle perfection steps, agree valuation side letters.
- Weeks 8–10: Clear CPs, obtain LPAC resolutions, co-investor consents, KYC/AML, finalize collateral schedules and perfection.
- Weeks 10–12: Test cash control, deliver borrowing base certificate, execute hedges, fund.
Critical path items typically include intercreditor with the commitment-backed line bank, LPA consents, and local perfection. Core owners are sponsor treasury and legal, the lender deal team, counsel across jurisdictions, fund administrators, the security agent, account banks, and valuation or audit stakeholders.
Pitfalls and quick kill tests
- LPA blocks: Borrowing or security restrictions with limited LPAC support sink timing.
- Intercreditor friction: Senior bank terms on standstill or turnover can gut recoveries.
- Capacity shortfall: Concentration or haircuts drop effective advance below needs.
- Security gaps: Shareholder agreements prohibit holdco pledges, undercutting enforceability.
- Weak valuation: Level 3 marks without third-party validation or recent exits raise risk.
- Serviceability risk: Distributions cannot cover cash interest and PIK pushes LTV near limits.
- FX constraints: Borrower-level hedging blocked by account setup creates volatility.
- Tax leakage: Withholding and trapped cash reduce service capacity without gross-up.
- Licensing gaps: Non-bank lenders face unresolved local requirements.
- GP instability: Key-person events and LP disputes undermine governance.
Enforcement and recovery – plan for stress
Luxembourg, Jersey, and Guernsey allow swift enforcement on share pledges through appropriation or private sale. English law supports receivership and sale of charged shares. Pre-clear change-of-control needs in shareholder and financing documents at the portfolio level. In stress, lenders can hold SPVs for orderly sales, sell the facility to a secondary buyer, or support a GP-led continuation transaction and take proceeds per priority.
Disclosure and LP relations
LPs expect visibility on fund-level leverage beyond commitment-backed lines. Many LPAs require LPAC approval for NAV borrowing and set use-of-proceeds boundaries. Sponsors reduce friction by tying sweeps to specific follow-ons, maintaining existing hurdles for carry, limiting debt-funded distributions, and supplying granular reporting.
Outlook and a practical playbook
As exits pick up, NAV facilities should shift from liquidity bridges to offense, including bolt-ons, platform consolidation, and refinancing expensive asset-level debt. Banks will remain selective, while private credit and specialist NAV lenders continue to shape structures and speed. The sponsors who win prepare early: clean LPA authority, pre-baked intercreditor language in commitment-backed lines, disciplined valuation, and cash forecasting that ties directly to service and sweeps.
Key takeaway
Match borrowing to near-term value creation, control the cash, and keep flexibility to manage through the cycle. If you can answer why now, how it is serviced, and what takes it out, a NAV facility can be a fast, non-dilutive tool for portfolio-level execution.