This is the first of three blog posts based on our recent white paper, available at the link above.

Today’s challenging exit environment, which has constrained capital and liquidity for private equity general partners (GPs) and limited partners (LPs) alike, has forced many GPs to hold on to assets longer than initially planned. As harvest periods extend, GPs face limitations in accessing traditional capital sources. Meanwhile, LPs are clamoring for cash distributions and liquidity to help them manage their cash flows and allow them to commit to new funds.

Amid this dynamic, net asset value (NAV) financings—or “NAV loans”—have emerged as a vital capital source, particularly for private equity buyout strategies. As the financing needs of GPs become increasingly multifaceted, NAV financings are poised to gain prominence along with the continued growth in private markets.

What Are NAV Loans?

NAV financing is a type of lending to investment funds and asset managers in which the cash flows and the value of the fund’s underlying assets serve as collateral for the loan. The proceeds from NAV loans enable GPs to refinance debt, manage liquidity, distribute capital to investors, or make additional investments such as add-on acquisitions. NAV loans come in various forms, including term loans, revolving credit facilities, and preferred equity-like structures, offering GPs greater flexibility than traditional portfolio company debt, which often carries restrictive covenants. While buyout portfolios have traditionally been the primary collateral, the scope has expanded to include venture, growth, real estate, and infrastructure funds.

With diversified collateral within a buyout portfolio, NAV loans typically enjoy better pricing and flexibility compared to single-asset financing. Facilities can range from $50 million to over $1 billion, with conservative loan-to-value (LTV) ratios typically around 10%-20% at entry. These loans allow GPs to retain assets longer, maximize value creation, and manage liquidity challenges in tough exit markets. When structured thoughtfully and aligned with LP interests, NAV loans can create mutually beneficial outcomes for all stakeholders.

NAV Loans Use: Key Issues to Consider

Fund Finance Partners, an independent debt advisory firm that created the NAV Lending Index (NLI), suggests that approximately 95% of NAV loans were used for money-in transactions, with 5% for money-out transactions, based on voluntary submissions. (With “money-in” transactions, the GP seeks to build value by facilitating growth. NAV loans that only facilitate distributions are considered “money-out” transactions.) Callan’s analysis, based on data obtained from prominent NAV lenders and service providers, suggests the breakdown is roughly 80% “money-in” and 20% “money-out” transactions.

For borrowers, NAV financing can offer more favorable interest rates, as the collateral consists of a diversified portfolio of assets compared to the single-asset collateral used in direct lending. Lower LTV ratios on these facilities also help reduce risk, allowing lenders to offer lower coupon rates. In the current challenging exit environment, rather than selling valuable assets at unattractive prices in secondary markets, GPs and funds can hold on to these assets with an NAV loan that may finance growth initiatives and position these assets for a better exit price in a more favorable macro environment.

NAV financing is poised to make further inroads in private fund financing, offering liquidity and flexibility to GPs while retaining the upside and diversifying returns for lenders based on seniority and diversity of collateral. However, just like traditional forms of leverage, NAV loans can amplify positive outcomes and mistakes depending on how they are deployed and underwritten. The NAV loan market’s continued success depends on careful management of these risks, as well as transparent communication and alignment with stakeholder interests.