NAV-Based Credit Facilities: Liquidity Without the Exit
As private market portfolios mature and the pace of distributions slows, fund managers and allocators are increasingly seeking liquidity without the need to exit long-term holdings. Enter NAV-based credit facilities: a sophisticated financing solution that allows funds to borrow against the value of their portfolio, unlocking capital without disrupting their investment strategy.
These facilities are becoming especially relevant for closed-end vehicles like private equity, secondaries, and fund-of-funds, offering a flexible tool for liquidity management, follow-on investments, or strategic acquisitions.
What Is a NAV-Based Credit Facility?
Definition and Core Concept
A NAV-based credit facility is a loan secured by the net asset value of a private fund’s portfolio, typically made up of limited partnership interests in private equity, venture, or credit strategies. Unlike subscription lines that are backed by uncalled capital from LPs, NAV facilities are collateralized by the actual value of the fund’s investments.
Who Uses Them
NAV lending is primarily used by:
- Mature closed-end funds nearing or in their harvesting phase
- Fund-of-funds or secondary funds seeking portfolio-level liquidity
- GPs looking to fund follow-on rounds or manage distributions
How It Works
Mechanics of the Facility
Here’s a simplified diagram of how a NAV-based credit facility is structured:
- The lender performs a due diligence process to underwrite the NAV of the portfolio.
- The loan amount is based on an advance rate (typically 20-50% of eligible NAV).
- Funds can be used for liquidity needs, follow-ons, or refinancing.
- Repayment is typically from future distributions.
Terms and Structures
Common terms include:
- Advance Rate: 20-50% of NAV
- Loan Term: 2-4 years
- Interest Rate: Floating (e.g., SOFR + spread)
- Security: Often non-recourse to the GP, collateralized at the SPV or HoldCo level
NAV Lending vs. Other Fund Finance Tools
Here’s how NAV-based lending compares to other common fund finance instruments:
| NAV-Based Credit Facility | Subscription Line of Credit | Continuation Fund | |
|---|---|---|---|
| Collateral | Portfolio NAV | Uncalled LP capital | Specific assets spun into SPV |
| Fund Lifecycle | Mid to late stage | Early stage | Tail-end, extension strategy |
| Use of Proceeds | Liquidity, follow-ons, refi | Capital call bridging | Extend holding, liquidity |
| Recourse | Typically non-recourse to GP | Fund-level | GP and LP discretion |
| Duration | 2-4 years | 6-12 months | Long-dated (5-10 years) |
Benefits of NAV-Based Credit Facilities
Liquidity Without Selling
Funds can raise capital without selling assets at a discount or disrupting long-term strategies.
Support for Portfolio Companies
GPs can provide follow-on capital during downturns or funding gaps.
Distribution Management
Smooth out capital returned to LPs, especially when distributions are lumpy or delayed.
Strategic Capital Deployment
Secondary funds may use proceeds to purchase more fund stakes or participate in continuation vehicles.
Key Risks and Considerations
Valuation Risk
NAVs are often based on quarterly marks or manager estimates, there’s inherent subjectivity and potential mismatch with lender assumptions.
Leverage Amplification
NAV loans introduce leverage at the fund level, increasing exposure to downside scenarios.
Restrictive Covenants
Lenders may impose controls on distributions, asset sales, or portfolio management.
Structural Complexity
Different legal, tax, and jurisdictional frameworks can complicate implementation, especially for cross-border funds.
The Takeaway
NAV-based credit facilities are quickly becoming a key liquidity tool for sophisticated private market investors. By enabling access to capital without selling core assets, they help funds stay flexible, resilient, and opportunistic, especially in volatile or capital-constrained environments.
Still, these facilities come with a learning curve. Investors should assess not just the potential upside, but also the structural complexity, leverage implications, and lender terms. When used thoughtfully, NAV lending can be a powerful part of the private market toolkit, bridging the gap between long-term value creation and short-term liquidity needs.
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