A net asset value facility is a secured loan to a private fund or fund-controlled vehicle, underwritten to the value and cash flows of the fund’s existing investments. It is distinct from subscription lines, which rely on uncalled investor commitments, and from portfolio company or GP-level debt. Think of it as portfolio-level leverage aimed at liquidity and flexibility, not at buying more assets.
This overview clarifies where NAV facilities fit in the fund financing toolkit, how lenders structure security and borrowing bases, what drives economics, and how to negotiate cleanly. The payoff is speed with control: the facility helps sponsors unlock liquidity while preserving alignment with limited partners.
Why sponsors use NAV facilities and when they fit
Sponsors tap NAV facilities for follow-on funding, bridging exits, rebalancing portfolios, and smoothing distributions. Many treat them as standing tools rather than last-minute fixes. Lenders span banks, insurers, private credit funds, and specialist platforms. Incentives diverge: sponsors want speed and flexible collateral, lenders want tested cash flows and enforceable security, and LPs want alignment with minimal cross-vintage leakage. The trade is pace and flexibility for oversight and structure.
A simple rule of thumb helps scope fit. If draw needs are tied to recurring portfolio distributions with diversified exposure, NAV debt often beats equity on cost. If value is concentrated in a few assets or realizations are uncertain, a structured equity alternative may be safer on covenants and default risk.
Legal structure and ring-fencing for enforceable recourse
Borrowers are commonly Cayman or Delaware partnerships, Luxembourg SCSp or SCS, or special purpose vehicles. Lenders aim to ring-fence recourse to the borrowing fund or SPV through limited recourse and non-petition language. Collateral typically includes pledges over equity in holding vehicles, rights to distributions and accounts, and sometimes intercompany receivables. Governing law is usually New York or English for predictability and close certainty.
Perfection is a details game. Under New York law, converting LLC interests to Article 8 securities enables control for better perfection. In Luxembourg, first-ranking pledges under the 5 August 2005 collateral law are the standard. In the UK, share charges and receivables assignments require Companies House filings. Diligence must test transfer restrictions, cross-defaults, and cash management that could erode the fence.
Ring-fencing is contractual, not statutory. Bankruptcy remoteness comes from limited recourse, non-petition undertakings, and separateness covenants in SPVs. Therefore, sponsors should proof cash movements, side letters, and information rights against enforcement requirements before term sheets are signed.
Fresh angle: pre-bake collateral portability
Operationally portable collateral speeds closing and improves execution. Converting LLC interests to Article 8, refreshing share registers, aligning bank account ownership, and securing consents before a mandate reduces surprises. Sponsors who build a collateral portability checklist early often compress timelines by weeks and secure tighter pricing.
Borrowing base mechanics and cash flow controls
Facilities run as revolving or term loans, with availability aligned to expected realizations. The borrowing base starts with eligible assets at adjusted NAV, then applies haircuts for sector, liquidity, control, and currency. Concentration limits cap single asset, sector, or geography exposure. Advance rates scale by asset type, and concentrated pools see tighter covenants such as minimum MOIC or portfolio-level EBITDA and interest coverage. It is underwriting by portfolio, not by headline NAV.
Collateral and control usually include:
- Equity pledges: Pledges over equity interests in holding entities, distributions, intercompany receivables, and sale proceeds.
- Account control: Pledges over collection accounts with account control agreements and springing control mechanics.
- Negative pledge: Restrictions on pari passu or senior liens on the same collateral to prevent leakage.
Cash waterfalls typically pay fees and costs, then cash interest, then scheduled principal, then agreed sweeps, with residue returned to the fund. Triggers rely on loan to value, NAV coverage, or portfolio performance. Breach of base-case tests stops draws and traps partial cash. Breach of hard tests can force full sweeps and a cure plan.
Eligibility constraints and consents that shape structure
Shareholder and co-invest agreements often restrict pledges or transfers. Some assets will be ineligible or haircut heavily. Sponsors should surface restrictions early so lenders can price and structure around them. Early visibility usually yields better advance rates because the risk is defined rather than assumed.
Information rights and valuation governance
Lenders expect monthly or quarterly investment-level cash flows, valuations with methods and assumptions, pipeline and exit cases, and working model files. Most facilities allow lenders to interact with auditors and, after certain triggers, appoint an independent valuation firm. The clearer the valuation policy and back-testing cadence, the less friction during drawdowns and re-sets.
Practical tip: a single source of truth dashboard
A shared dashboard that reconciles model assumptions, actuals, borrowing-base changes, and covenant headroom can avoid debate and save weeks. Sponsors that supply data tapes rather than PDFs typically obtain faster credit approvals and tighter grids.
Documents that drive terms and enforcement
- Facility agreement: Commitments, pricing, covenants, defaults, and calculation mechanics drafted by lender counsel.
- Security agreements: Local law share pledges, account charges, receivables assignments, and any guarantees with aligned definitions to prevent leakage.
- Intercreditor agreements: Lien priority, standstill, and waterfall where other debt exists, such as intercreditor agreements around subscription lines.
- Account control agreements: Tri-party agreements with banks, including tested springing control.
- Manager acknowledgements: Investment management agreement acknowledgements describing duties and cooperation on enforcement.
- Approvals and notices: Corporate approvals, LPAC approvals if needed, and investor notices where mandated.
- Legal opinions: Cross-border capacity, enforceability, choice of law, and perfection opinions.
- Tax support: Withholding documentation and transfer pricing analysis where intercompany flows exist.
Economics and fees in practice
Pricing follows concentration, exit dispersion, and collateral quality. Margins sit above subscription lines, often over SOFR or EURIBOR with floors when rates wobble. All-in cost tightens with diversification and sponsor control, and widens for concentrated or stressed pools. The fee stack typically includes upfront or OID, undrawn fees, amendment and extension fees, early prepayment premiums or make-wholes, occasional exit fees, and agency or monitoring fees.
Cash interest may include a PIK toggle when cash is tight. Most structures sweep a share of realizations to amortize principal even when covenants are clean. Interest periods and resets track changes in realized NAV and portfolio-level control events. For deeper context on structuring choices, see this overview of NAV financing.
Short example for intuition
Assume a 1,000 million NAV fund secures a facility at a 25 percent base advance rate with 30 percent haircuts on less liquid assets, yielding roughly 200 million of availability. It draws 100 million. After 60 million of distributions, a 50 percent sweep pays down 30 million. The balance supports distributions or reinvestment within agreed baskets.
Accounting, valuation, and reporting
Funds generally book NAV facilities at amortized cost under IFRS 9 and US GAAP, with fees amortized via the effective interest method. Consolidation usually remains unchanged because SPVs stay consolidated where the fund directs relevant activities and bears variable returns. Disclosures should cover liquidity risk, maturities, collateral, and covenant sensitivity. Lenders account for the loans at amortized cost or fair value depending on business model and classification tests.
Valuation is the pressure point. Lenders rely on sponsor marks but want evidence: back-testing, methodology memos, and at times third-party reviews. Setting expectations upfront avoids pricing drift and minimizes drawdown delays when markets shift.
Tax and regulatory touchpoints that move the needle
At the borrower level, watch withholding. U.S. structures often rely on the portfolio interest exemption or treaty relief, while EU and UK borrowers use domestic regimes, treaties, or the quoted Eurobond exemption. Interest deductibility may be limited by section 163(j) and hybrid mismatch rules. Routing leverage through blockers can change the math. Transfer pricing governs intercompany flows that service the facility. For investors, NAV facilities typically do not create UBTI for tax-exempt LPs, but debt-financed property rules should be tested if applicable.
At fund level, NAV facilities count as leverage under AIFMD. AIFMs must monitor exposure and disclose leverage sources and collateral reuse. The AIFMD II update tightens expectations on liquidity and risk reporting. In the U.S., Form PF amendments increased reporting of material financing events and covenant issues for large advisers. KYC and AML remain standard for lenders and account banks. ERISA plan asset status, if present, triggers prohibited transaction analysis or exemptions.
Common risks and edge cases to neutralize early
- Soft NAVs: Stale or optimistic marks inflate bases. Expect ratchets, conservative haircuts, and independent checks.
- Correlated exposure: Loan to value that looks fine by asset can turn quickly at the portfolio level.
- Perfection gaps: Missing Article 8 opt-ins or consents can neutralize security, undermining close certainty.
- Cash-control slippage: Weak account control or loose springing mechanics lets cash bypass sweeps.
- Minority and co-invest rights: Partner vetoes can block enforcement. Plan workarounds early.
- Manager dependency: Step-in rights must mesh with fund removal mechanics.
- Enforcement realism: Selling fund interests is slower than selling hard assets. Plan for negotiated paydowns.
- Cross-fund collateral: Cross-vintage support raises LP alignment questions. Use sparingly with clear governance.
Alternatives and when they win on risk or cost
NAV preferred equity trades interest deductibility for flexibility and no events of default. It can fit when concentration is high or downside risk is acute. For a side-by-side comparison, see NAV loans vs preferred equity. GP-led continuation funds reset hold periods for a few assets and can unlock larger size, but require LPAC processes, fairness opinions, and time. Portfolio company-level debt may be cheaper and non-recourse, but diligence and timing often run longer, especially for small and mid-market assets. Early in the investment period, subscription credit facilities remain efficient. As a separate sponsor toolkit item, unitranche loans can pair with or substitute for NAV financing depending on portfolio objectives.
Build and negotiate with a focused playbook
- Pre-screen and size: Confirm borrowing and pledge rights in fund documents, map jurisdictions and consents, size availability with conservative haircuts and concentration limits, and test amortization under a 24 to 36 month downside timeline.
- Term sheet anchors: Define borrower and collateral perimeter, set advance rates, ineligibles and caps, agree reporting, valuation oversight, pricing and fees, and fix use-of-proceeds and distribution baskets.
- Data and diligence: Deliver legal packs, historical cash flows, base and downside models, fund governance documents, and tax memos.
- Borrowing base grid: Bucket assets with defined haircuts, flag ineligibles by objective criteria, and share executable models with change logs tied to financial statements.
- Covenant calibration: Define maximum LTV, minimum portfolio cash interest coverage, and minimum NAV coverage. Stage traps, stop-draws, defaults, and clear cure tools such as prepay, collateral top-up, or equity add.
- Security structuring: Complete Article 8 opt-ins, execute Luxembourg or UK pledges, obtain consents, open pledged accounts and finalize control agreements with tested springing mechanics, and align step-in rights with fund documents.
- Tax and regulation: Optimize borrower for withholding and deductibility, align AIFMD and Form PF reporting, and confirm ERISA status and any needed exemptions.
- Drafting alignment: Lock definitions, borrowing base math, valuation rights, waterfall, and information covenants. Align intercreditor terms with subscription lines and portfolio-level debt, and choose governing law consistent with syndication strategy.
- Conditions precedent: Deliver cross-border opinions, perfection evidence, valuation support, LPAC approvals if required, and operationally tested agency and account control.
Timeline and critical path to first draw
A credible path is 8 to 12 weeks from mandate to first draw. Weeks 0 to 2 cover the term sheet. Weeks 2 to 6 focus on legal and collateral diligence and borrower structure. Weeks 3 to 7 cover drafts of the facility, security, and control agreements. Weeks 4 to 8 address perfection planning, consents, Article 8 steps, Luxembourg pledges, tax and regulatory sign-offs, and account onboarding. Weeks 7 to 10 finalize the borrowing base and covenants and test reporting flows. Weeks 9 to 12 close conditions, opinions, LPAC approvals, and the first utilization. Consents, account control, and cross-border perfection set the pace, so pre-baking Article 8 elections and consents saves time.
Governance, operations, and closeout discipline
Stand up a cross-functional working group spanning the deal team, fund counsel, tax, finance, and the administrator. Name owners for the borrowing base, collateral mapping, and reporting. Build an early-warning dashboard for triggers and maturities. Lenders should maintain valuation governance and a workout playbook, with light-touch enforcement counsel engagement post close.
Operational hygiene that prevents rework
- Full audit trail: Archive versions, indices, Q&A, user lists, and logs, hash the archive, set retention schedules, and require vendor deletion with a destruction certificate. Note that legal holds override deletion policies.
Where terms land now and regional nuances
Two shifts define current practice. First, lenders want data tapes and model files, not PDFs. Second, valuation disputes are pre-wired with third-party rights and temporary base adjustments while parties reconcile marks. Sponsors who invest in clean collateral, aligned fund documents, and reporting cadence close faster and cheaper than those who treat each deal as bespoke. For regional nuance, compare European NAV lending norms with US and Europe NAV facilities differences on leverage, pricing, and security.
Final screen before you sign
- Collateral viability: Do transfer restrictions or co-invest vetoes dominate the collateral set?
- Document alignment: Do the fund LPA and side letters support the waterfall and step-in mechanics the lender needs?
- Downside timing: Do exit timelines amortize the facility inside maturity under a downside case?
- Cash control: Are account control and sweeps enforceable across all relevant jurisdictions?
- Relative cost: Is the after-tax cost competitive against preferred equity or a continuation fund?
Conclusion
NAV facilities provide portfolio-level liquidity with tailored collateral and disciplined cash controls. Sponsors that front-load eligibility, data, and perfection work secure faster closes and better pricing. If any element of collateral, valuation, or cash control wobbles, fix the structure before you fix the price.