A net asset value facility is a senior secured loan to a fund or holding company that is underwritten against the fair value of the fund’s portfolio. The collateral sits at the fund-level holding stack – equity pledges, rights to distributions, controlled bank accounts, and related claims – rather than at the asset level. Recourse stops at that collateral unless the deal is structured as a hybrid that adds capital-call rights.
In practice, NAV lines are distinct from subscription facilities that rely on limited partner commitments and from management company loans that rely on fee streams. Hybrids combine both collateral sets to increase capacity. General partners use NAV leverage to fund follow-ons, refinance, smooth distributions, and manage lumpy exit calendars. Lenders, meanwhile, look for diversified collateral, clear valuation discipline, and tight cash control. Limited partners watch leverage limits, alignment, and fund agreement or AIFMD constraints to ensure the facility supports, not distorts, outcomes.
Why regional legal plumbing drives terms and pricing
NAV lending now operates as a repeatable, documented product in the US and Europe, but the legal plumbing differs. Europe leans on Luxembourg and English law pledges that reach holding companies above the assets. US deals rely more on UCC Article 9 security interests and control of bank accounts. That difference shows up in enforceability and speed of recovery and, in turn, in leverage, documentation, and pricing throughout the capital stack.
Use expanded during the higher rate cycle. Secondaries funds led because cash flows are more granular and closer dated, and buyout funds followed as distributions slowed. Market size sits in the tens of billions and grew through 2023-2024, although many deals never see a press release. The opacity means ranges, not absolutes, but the direction is clear: more demand for non dilutive liquidity and liability management through NAV financing NAV financing.
Borrower setup and governing law choices that matter
US borrowers are usually Delaware funds or LLCs documented under New York law. Lenders perfect under UCC Article 9 on equity interests in intermediate holding companies, take control over bank accounts, and secure rights to distributions and receivables. Direct pledges of portfolio company shares are uncommon because transfer restrictions and change-of-control rules often block them.
European borrowers often sit in Luxembourg (SCSp or SCS, RAIF) or English or Jersey holding stacks. Facilities are documented under English or Luxembourg law. Lenders take Luxembourg share pledges over holdcos, receivables pledges over shareholder loans, and English law charges over accounts. The Luxembourg 2005 collateral law and UK Financial Collateral Regulations permit out-of-court appropriation or sale with agreed valuation mechanics. That shorter enforcement path influences advance rates and margins.
Security packages and enforcement paths that protect recovery
US security package in practice
- Equity pledges: Article 9 security over equity in the borrower and intermediate vehicles.
- Cash control: Account control agreements over distribution accounts to capture dividends, interest, and exit proceeds.
- Receivables rights: Security in rights to distributions and intercompany receivables.
- Negative pledge: Restrictions on pledging portfolio shares; direct share pledges are the exception.
- Restricted payments: Tight controls tied to coverage tests and deleveraging triggers.
- Valuation reporting: Detailed borrowing base and performance reporting, with challenge rights.
European security package in practice
- Lux share pledges: Luxembourg law pledges over holdcos that own the investments, annotated in share registers and supported by parallel debt or security agent structures.
- Receivables pledges: Luxembourg law security over shareholder loans and other receivables.
- Account charges: English law charges over bank accounts to lock cash.
- Rapid enforcement: Recognition of out-of-court appropriation or rapid sale with commercially reasonable valuation.
Because European security often reaches closer to operating assets, lenders view recovery as more certain. That perception supports higher advance rates at a given risk level when intercreditor issues are solved, and it typically compresses margins by 25-75 bps compared with similar US risk.
Enforcement and recovery by region
US lenders lean on cash dominion and Article 9 foreclosure. Private sales must be commercially reasonable, and timing can stretch if portfolio-level approvals or consents slow a transfer. European lenders can appropriate or sell pledged shares at Luxembourish or UK holdcos without court steps, subject to agreed valuation methods or an independent expert, which shortens timelines and lowers loss given default. Faster enforcement reduces tail risk and supports higher loan to value at similar pricing.
How lenders size borrowing capacity against eligible NAV
Borrowing bases start with eligible NAV less haircuts and reserves. Eligibility typically excludes assets with pledge restrictions, portfolio company events of default, or insufficient scale. The lower the concentration and the tighter the valuation discipline, the higher the advance.
Common borrowing base mechanics
- Eligibility: Jurisdiction, pledge and assignment limits, no portfolio company default, and minimum EBITDA or valuation thresholds.
- Valuation cadence: Quarterly GP marks under US GAAP or IFRS, with lender challenge and third party valuations when coverage tightens.
- Concentration limits: Caps by asset, sector, geography, and vintage; more granularity means lower haircuts.
- Reserves: Known tax, fees, litigation, unfunded commitments, and capex deducted from availability.
Advance rate ranges by asset mix
- Diversified secondaries: Europe 25-40 percent of NAV; US 20-35 percent. The European edge reflects enforceability and appropriation.
- Concentrated buyout: Europe 10-25 percent; US 10-20 percent, driven by underlying leverage and sponsor control.
- Single asset: Often 5-15 percent advances or structured as preferred equity, with higher cost and slower draws.
Hybrids that add capital-call rights can lift effective LTV coverage by roughly 100-300 bps, if fund documents allow it and intercreditor terms are tight. For a primer on where NAV facilities vs subscription lines differ on collateral and recourse, see NAV facilities vs subscription lines.
Covenants, pricing, and fees you should expect
Both regions anchor on an LTV covenant that compares debt to eligible NAV. If breached, cash traps and sweeps spring, while acceleration usually arrives only with payment default or bad conduct. Cures come from deleveraging or adding eligible assets, with valuation cures tightly bounded to avoid circular logic.
Reference rates and margins
- Base rates: US facilities float over daily SOFR. Europe uses EURIBOR for euros and SONIA for sterling.
- US pricing: Buyout focused lines often price at SOFR + 450-700 bps; diversified secondaries at SOFR + 375-550 bps. OID runs 100-300 bps.
- European pricing: Diversified pools often price at EURIBOR + 375-600 bps; concentrated stacks at EURIBOR + 500-750 bps. OID is 50-200 bps where banks compete and higher in private credit clubs.
Drawing mechanics and fees
- Undrawn fees: 50-100 bps on commitments, scaled by utilization.
- Amendments: 25-100 bps for covenant resets or collateral enhancements.
- Prepayment: Soft call or make whole for 6-12 months is common in private credit; bank led European deals more often prepay at par.
- Hedging: Often optional but sized to 50-75 percent of expected drawn amounts under an ISDA, with lender consent.
As a simple rule of thumb, a European secondaries fund borrowing 300 million euros at EURIBOR + 450 bps with 100 bps OID and 70 percent utilization will pay roughly 8 percent cash interest on the drawn amount in year one, plus OID amortization and undrawn fees. A similar US line at SOFR + 525 bps and 200 bps OID typically runs 150-250 bps wider all in, depending on utilization and hedging.
Cash control, reporting, and intercreditor priorities
Cash waterfalls look similar across regions: controlled accounts pay costs, interest, then required sweeps before distributions to the fund. In the US, account control agreements do the heavy lifting, and cash dominion springs at preset LTV triggers or after default. In Europe, security reaches higher in the structure, lenders receive direct notices at Luxembourg holdcos, and post default they can instruct appropriations.
Priority between subscription and NAV lenders dictates real drawability and stress behavior. US deals often keep capital-call rights first for the subscription line and give NAV lenders control over distributions only outside subscription defaults. Europe uses parallel debt or a security agent to coordinate creditor classes with negotiated lockboxes and sweep priorities. In both markets, a clear standstill and waterfall protect subscription lenders’ first call on investor commitments. For a broader view of subscription credit facilities in practice, see subscription credit facilities.
Documentation, execution timeline, and LPAC optics
US and European documentation maps
- US documents: New York law credit agreement, Article 9 security and equity pledges, and account control agreements. Intercreditor arrangements apply when a subscription facility exists. Deliverables include valuation policy schedules, borrowing capacity confirmations, and New York and Delaware opinions.
- European documents: English law facility agreement, Luxembourg share and receivables pledges, English account charges, and parallel debt or a security agent. Deliverables include updated share registers and pledge annotations, issuer notices, AIFMD leverage calculations, and opinions from Luxembourg, England, and the fund domicile.
Execution timeline with gating items
- Weeks 1-2: Term sheet, eligibility grid, collateral map, AIFMD headroom, and fund document checks.
- Weeks 3-6: Draft and negotiate documentation, including intercreditor arrangements.
- Weeks 5-8: Conditions precedent: share register updates, consents, valuation policy delivery, legal opinions, and borrowing base templates.
- Weeks 8-12: Closing and first funding, cash sweep mechanics checks, agent account controls, and any hedging.
LPAC communication playbook
- Use case clarity: Explain whether proceeds fund follow ons, liability management, or distribution smoothing, with quantified scenario models for 15-30 percent NAV shocks.
- Governance guardrails: Outline LTV limits, cash traps, independent valuation triggers, and deleveraging plans if coverage tightens.
- Fee transparency: Show all in cost including OID, undrawn fees, and expected hedging spend, and benchmark against alternatives such as NAV loans vs preferred equity.
Accounting, tax, and regulatory touchpoints to anticipate
Under US GAAP and IFRS, NAV lines are borrowings. Interest is expensed, and OID and fees amortize over the expected life under the effective interest method. Disclosures cover collateral, covenants, and maturities. Fair value of investments remains GP driven under ASC 820 or IFRS 13, with lender challenge rights when coverage tightens. Special purpose borrowers usually consolidate to the fund, and auditors confirm the non recourse nature in the notes.
On tax, the US portfolio interest exemption can reduce withholding to zero for qualifying non US lenders, while interest deductibility flows to partners subject to blocker and earnings stripping limits. Luxembourg generally has no withholding on arm’s length interest, and UK withholding can apply unless treaty or private placement exemptions are available. Hybrid mismatch rules affect preferred equity, but plain debt NAV lines usually sit outside those limits.
Regulatory considerations include AIFMD leverage calculations and Annex IV disclosures for borrowings, collateral, and counterparties. SEC registered advisers align custody and valuation policies with facility covenants, and side letters that bar fund level leverage require consents. KYC and AML checks are deeper at European holdco levels, while US private credit lenders often move faster but still require robust sanctions and AML coverage. For broader private credit market context, see private credit market trends.
Key risks and the governance tools that mitigate them
- Valuation drops: A 15 percent NAV decline can trip LTV on concentrated books and trap cash at the wrong time; pre agree valuation triggers and deleveraging playbooks.
- Intercreditor slippage: Ambiguous waterfalls cause disputes under stress; lock priority and standstill terms on day one.
- Portfolio restrictions: Upstream pledge or distribution blocks cap eligibility; map these early and price the friction.
- Concentration drift: Bolt ons or exits can breach concentration limits and trigger haircuts; model procyclicality and adjust advance rates.
- Governance events: Key person or removal events can trigger defaults; secure step in information rights.
- Enforcement realism: Article 9 sales face diligence and NDA hurdles; European appropriation shortens but does not erase those constraints.
- Independent valuations: Use a pre agreed panel with cost sharing once LTV approaches thresholds.
- Information cadence: Deliver quarterly borrowing base certificates, portfolio leverage data, and auditor letters on valuation controls.
- Cash dominion: Implement springing dominion at specified LTV triggers with compliant account control across jurisdictions.
Alternatives and when they fit better
Preferred equity can be quicker, with no hard maturity and PIK flexibility, but it is more expensive and can count toward AIFMD leverage optics. It fits single asset or volatile exposures where share pledges are impractical. Hybrids offer more capacity and better pricing with dual collateral, but only if LP consents and intercreditor terms are precise. Holdco loans directly at the portfolio holdco can be cheaper but reduce flexibility and raise disclosure complexity and intercreditor friction.
If your structure includes a lender above senior operating company debt, you may also compare NAV loans with instruments like holdco PIK notes or consider whether supplemental debt beneath NAV financing, such as second lien loans, makes sense in the capital stack capital stack.
Practical guardrails that improve outcomes
- Design for enforceability: If Luxembourg or English share pledges are feasible, structure for appropriation even if you are a US sponsor accessing European lenders.
- Treat valuation as control: Pre agree thresholds, timelines, and dispute steps so coverage tests are credible and repeatable.
- Set one architecture: Align subscription and NAV lenders with a single intercreditor approach and a tested lockbox and waterfall.
- Model stress: Run 15-30 percent NAV declines and delayed exits; if deleveraging becomes likely, resize or pivot to preferred equity.
- Check headroom early: Confirm AIFMD and fund document limits before you shop the deal to preserve negotiating leverage.
For additional regional nuance, compare structures and risks in European mid market NAV lending, and remember that cross border execution often hinges on how intercreditor mechanics are drafted and tested in practice.
Closing Thoughts
NAV facilities convert diversified portfolio value into flexible, non dilutive liquidity. Europe’s enforceability edge usually supports slightly higher advance rates and tighter pricing, while the US model offers speed and flexibility where share pledges are impractical. Whatever the venue, the best outcomes come from enforceable holdco security, disciplined valuation, clear intercreditor priorities, and a transparent LPAC narrative.