A net asset value facility is a loan to a fund that is secured by the value and cash flows of its portfolio companies, while a subscription line is a short term facility secured by investors’ uncalled commitments and the fund’s right to call them. A hybrid facility blends both collateral sets and shifts focus from commitments to asset value as the fund matures. The payoff for sponsors is speed and flexibility at different points in the fund’s life, provided everyone understands where repayment really comes from and how enforcement would work if conditions change.
Think of these tools as fund level liquidity bridges with limited recourse. Early in the fund, uncalled commitments are predictable and fast to draw. Mid to late life, the assets carry the value and the cash. When markets wobble, sponsors prize timing and optics; lenders prize enforceable security and dependable repayment; and limited partners want measured leverage, clear cost allocation, and discipline on valuations and use of proceeds.
What each facility does and when it fits
A subscription line typically lends to the fund partnership or a special purpose vehicle with the right to call capital and control the collection account. Its collateral is the call right supported by the fund’s governing documents and investor notices. Because it is short dated and repaid from capital calls or near term distributions, it is designed for working capital, bridging deals, and smoothing capital calls.
A NAV facility lends to the fund, a NAV SPV that holds portfolio interests, or a chain of holding companies established to isolate collateral and facilitate enforcement. Its collateral is equity in asset holding SPVs, distribution rights, and pledged accounts. Because it is underwritten to portfolio NAV and cash yield instead of uncalled commitments, it funds follow ons, structured liquidity, and timeline extensions later in the fund’s life.
A hybrid facility uses both collateral pools and transitions the borrowing base from commitments to asset value as deployment advances. That glide path lets managers optimize size and cost while maintaining speed early and coverage late.
Stakeholders and their objectives
Sponsors want speed, discretion, and staying power when markets move. They use these facilities to close quickly, avoid mid deal capital calls, or defend assets through a downturn. Lenders want enforceable security and clean repayment paths. They size and price to coverage, concentration, and enforcement mechanics. Limited partners want leverage that is purposeful and capped, costs that are transparent, and valuation governance that prevents borrowing against optimistic marks.
Structure, collateral, and recourse
Borrower entities and governing law
Fund borrowers are usually Delaware LPs or LLCs, Cayman exempted limited partnerships, or Luxembourg SCSp or SCS entities. NAV SPVs are often placed in enforcement friendly regimes such as Delaware, Cayman, Luxembourg, Jersey, or Guernsey. Credit agreements run under New York or English law, with local share charges or account security governed by the jurisdiction where equity interests or bank accounts sit. Proper perfection drives enforceability and speeds any workout.
Collateral packages and practical recourse
Subscription line security rests on three pillars:
- Call right: The right to call capital and receive contributions under the fund’s limited partnership agreement and subscription documents.
- Pledged account: A controlled collection account under an account control agreement that lets lenders sweep receipts.
- Ancillary rights: Investor notices or acknowledgments and a general partner power of attorney to issue calls and direct payments.
NAV facility security, by contrast, looks through to the assets:
- Share pledges: Pledges over shares of SPVs that hold portfolio investments, documented under local law to ensure swift transfer.
- Distribution rights: Assignments of intercompany loans and dividend or distribution rights to capture cash.
- Controlled accounts: Pledged bank accounts and cash sweeps that trap proceeds until tests are cleared.
Recourse follows the collateral. Subscription line lenders can direct or compel capital calls and sweep pledged accounts. NAV lenders can sweep distributions, exercise voting rights, appoint a receiver, and sell pledged interests or run a secondary sale process. Ring fencing via limited recourse language and non petition protections is central to both, but NAV deals lean more heavily on bankruptcy remote mechanics.
Mechanics: sizing, valuation, and flow of funds
Borrowing base vs LTV
Subscription lines use a borrowing base made of eligible investors. Each investor’s uncalled commitment is assigned an advance rate based on credit profile, concentration, sovereign immunity constraints, and side letter carve outs. Borrowings fund a pledged account and are repaid from capital calls or distributions, usually with clean downs to limit duration.
NAV facilities size against portfolio value and cash yield. The base applies a loan to value ratio to eligible asset NAV net of any senior leverage and concentration haircuts. Security includes share pledges, distribution assignments, and account control. Repayment comes from dividends, interest, and sale proceeds through sweeps, scheduled amortization, and mandatory prepayments.
Valuation governance and lender protections
Because NAV debt leans on sponsor marks, valuation rights are explicit. Lenders negotiate periodic floors, independent valuation triggers, and challenge rights that escalate to third party appraisals. This framework creates covenant resilience by addressing volatility before it becomes a default.
A quick sizing snapshot
Assume portfolio NAV of 1,000 across five assets after senior debt. A 30 percent single asset cap limits a 350 position to 300, reducing eligible NAV to 900. Apply a 20 percent haircut to a cyclical asset to reach 860. At 25 percent LTV, capacity is 215. If the facility requires 1.5 times interest coverage and trailing 12 month distributions are 30 against a cash cost of 8 percent on 215 (17.2), coverage of roughly 1.74 times clears the bar. The step from math to money is short, but it hinges on updated marks and durable cash yield.
Waterfalls, covenants, and triggers
Subscription lines reserve interest, fees, and principal ahead of partner distributions. Borrowing base breaches require curative capital calls. Triggers include loss of eligibility for key investors, base erosion, clean down timing, and fund level leverage limits in the LPA.
NAV facilities run a borrower or SPV waterfall. Distributions first cover taxes and expenses, then interest and fees, then scheduled or cash sweep principal, then excess to the fund. Triggers include LTV step ups, NAV floors, valuation events, debt service coverage tests, and concentration breaches. Breaches trap cash, block distributions, step pricing, and if persistent, force deleveraging. Clear tripwires keep everyone aligned on when protection kicks in.
Documentation map and execution sequence
Subscription lines typically include a credit agreement with borrowing base mechanics, a security agreement and account pledge under UCC Article 9, an account control agreement with the depository bank, investor notices where prudent, and legal opinions on authority, enforceability, and perfection. Diligence focuses on LPAs and side letters, building the eligibility grid, and standing up borrowing base reporting. With a concentrated, well documented LP base, closing can land in four to eight weeks.
NAV facilities add local law share charges for SPVs and any upstream holdcos, assignments of distributions and intercompany receivables, intercreditor agreements with asset level lenders and co investors, valuation policy language and appraisal rights, and opinions on capacity, corporate benefit, local perfection, and limited recourse enforceability. Execution starts by mapping the portfolio structure, identifying required consents, and lining up share charges and account control. Most deals close in eight to twelve weeks, with any missing consents covered by tight post closing undertakings.
Economics, fees, and a cost example
Subscription lines price to short duration and low expected loss. Terms include a floating base rate plus spread, undrawn fees, and standard upfront and admin fees. Short tenors and clean downs keep interest costs visible and contained. Legal and diligence spend tracks LP base complexity and side letter volume.
NAV facility pricing reflects collateral variability and structural complexity. Expect cash pay margins, possible PIK components, LTV based margin steps, commitment fees on undrawn tranches, and monitoring fees. Prepayment premia or make wholes protect setup costs for appraisals and intercreditor work. When facilities support distributions or continuation vehicles, delayed draw tranches align with business plans.
Illustratively, on a 200 NAV loan at a 4 percent base plus 8 percent margin and 1 percent PIK, annual cash interest is 24 and PIK is 2. If distributions are 40, the waterfall pays 24 interest, then 10 of principal under a 25 percent sweep, leaving 6 released to the fund. If NAV falls and the LTV grid steps up, the sweep can ratchet to retain all residuals until metrics recover.
Accounting, tax, and regulatory reporting
Under US GAAP, funds present investments at fair value and show subscription and NAV borrowings as liabilities. Consolidation of portfolio companies is rare, but consolidation of a borrowing SPV may be required under variable interest entity rules if the SPV is not an investment company and the fund is the primary beneficiary. Notes should disclose leverage terms, collateral, maturities, and covenant risks tied to valuation triggers.
Under IFRS, investment entities hold subsidiaries at fair value through profit or loss, except for service subsidiaries that may be consolidated. Disclosures under IFRS 7 cover liquidity, credit, and market risk, including sensitivity to fair value changes that could trigger sweeps or events of default. Lenders usually require quarterly compliance certificates, LTV or borrowing base calculations, and audited annuals aligned to the valuation policy.
Tax placement matters. Debt at the fund or pass through SPV can raise unrelated business taxable income for US tax exempt investors and effectively connected income for non US investors. Many managers borrow at blockers or corporate SPVs and use treaty jurisdictions to manage these outcomes. Intercompany loans between NAV SPVs and the fund invite transfer pricing review, and interest limitations such as US section 163(j) or the UK corporate interest restriction can cap deductibility based on EBITDA. Sweep mechanics and return of capital prioritization can reduce withholding on cross border payments and avoid trapped cash.
Regulatory compliance and investor communication
US private fund adviser rules now require quarterly statements with standardized fee, expense, and performance disclosures and annual audits. These requirements elevate visibility on facility costs and allocation. In Europe and the UK, AIFMD reporting counts both subscription and NAV debt in leverage metrics under gross and commitment methods. KYC and AML diligence extends to borrower entities and controlled accounts, with sanctions, anti corruption, and ultimate beneficial owner representations standard. Marketing materials should describe conditional liquidity clearly and avoid implying open ended access.
Key risks and edge cases to underwrite
- LP enforceability: For subscription lines, sovereign immunity, ERISA constraints, and side letter carve outs can dilute eligibility. Grids and concentration caps should reflect this.
- Valuation volatility: For NAV loans, reliance on sponsor marks is mitigated by appraisal rights, haircuts, and floors.
- Transfer frictions: Right of first refusal rights, senior lender consents, and shareholder agreements can slow enforcement, so intercreditor and consent undertakings matter.
- Concentration risk: A few near exit assets can turn modest NAV moves into outsized LTV swings, creating liquidity traps.
- Cross vehicle conflicts: Collateral touching continuation funds or co invests requires aligned waterfalls and voting mechanics.
- Funds of funds exposure: Underlying managers’ gates and valuation timing argue for longer sweeps and higher haircuts.
- Venture and growth: Low dividends favor PIK heavy, low LTV structures until cash coverage improves.
- Asset backed strategies: NAV tests may converge with securitization style triggers and servicer controls.
Comparisons, complements, and practical selection
Asset level leverage is precise but fragmented and slower to amend. A NAV facility delivers portfolio level flexibility and diversification benefits while keeping recourse away from the manager. General partner lines are smaller and typically unsecured or fee stream backed. Preferred equity at the fund or SPV level provides junior capital without LTV tests and with broad draw flexibility. It costs more than NAV debt but can sidestep some transfer hurdles and valuation frictions.
At the company level, sponsors also use unitranche loans or second lien loans for incremental financing, and at the holdco they may issue holdco PIK notes to extend runway without burdening operating subsidiaries. These instruments address different cash nodes than fund level facilities and can be paired in an integrated capital stack.
Selection is straightforward. Choose a subscription line when the fund is early, the LP base is strong, and the need is bridging or working capital with quick turnover. Choose a NAV facility when most capital is deployed and portfolio cash flows and valuations support moderate leverage for follow ons, structured liquidity, or timeline extensions. Use a hybrid when uncalled commitments and asset coverage both contribute to size, with a clear glide path toward NAV only as deployment progresses.
Enforcement realities and execution discipline
Subscription line workouts revolve around capital calls. The cleanest outcomes come from LPAs and subscription documents that spell out authority, notice, and remedies. NAV facility workouts focus on sweeps, asset sales, and control of SPV voting. The best time to secure share charges, consents, and clear transfer mechanics is before closing. After a trigger, every missing consent adds cost and time. Cooperation with senior lenders and co investors depends on calibrated intercreditor terms and practiced communication.
2025 readiness: a practical playbook
Higher rates have plateaued, secondaries markets are deeper, and LP liquidity is still selective. That mix rewards sponsors who pre wire their fund documents and asset holding structures for NAV financing outcomes. A simple playbook helps: define use cases and limits in investment committee materials, line up appraisal providers and valuation calendars in advance, build a live LTV and coverage dashboard that ties to audited marks, and pre clear transfer mechanics with major co investors and senior lenders. When optics matter, cap line sizes, tie clean downs to realizations, and disclose costs and coverage metrics in quarterly letters.
Closing Thoughts
Subscription lines and NAV facilities solve different fund liquidity problems by underwriting different collateral. One is credit to LP commitments; the other is credit to portfolio assets. Price, covenants, and enforcement all flow from that fact. Sponsors who plan entity structures, LPA terms, valuation policies, and asset holding companies with these mechanics in mind will lower costs, reduce friction, and keep options open when the cycle surprises.
Further reading on mechanics and trade offs: NAV financing, subscription credit facilities, and preferred equity alongside NAV loans.