NAV Lending

Traditional fund finance, known as subscription lines, is secured against investors’ uncalled commitments and is used early in a fund’s life. NAV loans are typically used later, when the fund has invested most of its money and holds a portfolio of companies.

Funds use NAV loans for several purposes: providing money to support portfolio companies, such as funding acquisitions or refinancing debt; returning money to investors before investments are sold; or bridging gaps when selling companies takes longer than expected.

For example, a fund holding a portfolio valued at 1,000,000,000 might take a NAV loan of 100,000,000, a loan-to-value ratio of 10%, to support several of its companies.

NAV lending has grown rapidly, particularly since 2022, as a slowdown in company sales and stock market listings made it harder for private equity funds to return money to investors.

Critics argue that using NAV loans to make distributions to investors adds leverage and risk, and can make fund performance appear better by returning money earlier. Some institutional investors have asked for greater disclosure and limits on how NAV loans are used.