.avif)
Learn when NAV financing makes sense for private equity and private credit funds, how borrowing bases work, key risks, and alternatives.
A private fund can own hundreds of millions or billions of dollars of investments and still face a liquidity problem.
Capital may be tied up in portfolio companies or loans. Uncalled LP commitments may have declined. Exits may be taking longer than expected. A portfolio company may need follow-on capital. A private credit fund may have attractive new originations but limited remaining cash.
NAV financing addresses that mismatch by borrowing against the value of an existing investment portfolio rather than relying primarily on uncalled investor commitments.
The structure can be useful. It can also add leverage on top of assets that may already be leveraged themselves.
Quick Answer: NAV financing allows a private equity or private credit fund to borrow against the value of its investment portfolio. It can fund follow-ons, acquisitions, liquidity needs, distributions or additional loan originations when capital calls are limited. It makes the most sense when portfolio value is diversified, cash flows are visible and the fund has a credible repayment plan.
NAV financing is fund-level or fund-adjacent debt supported primarily by the value of a fund's underlying investments.
A lender is not simply underwriting the management company.
It is looking through to the assets inside the fund.
Depending on the structure, the borrower may be:
Mayer Brown's fund-finance overview describes fund-level NAV facilities as credit supported by the value of portfolio investments, often with collateral including interests in portfolio investments, investment proceeds and controlled accounts.
The financing is generally sized against an agreed borrowing base rather than simply the fund's reported gross NAV.
That distinction matters.
A fund reporting USD $1 billion of NAV does not necessarily have USD $1 billion of eligible collateral.
The lender is underwriting a different repayment source.
A subscription line generally relies on investors' uncalled capital commitments.
A NAV facility relies primarily on the fund's existing investments and the value or cash flows those investments can generate.
Subscription lines therefore tend to be most useful when a fund still has substantial callable capital.
NAV financing becomes more relevant after capital has been deployed and the portfolio itself represents the fund's main pool of value.
A fund can also have a hybrid facility supported by both remaining investor commitments and portfolio NAV.
Reuters reported in April 2026 that the global fund-finance market had surpassed $1 trillion, citing Moody's, with private credit contributing materially to its growth and hybrid structures becoming more prominent. (Reuters)
That growth does not make NAV debt appropriate for every fund. It means fund managers increasingly have another liquidity tool beyond capital calls and asset sales.
It makes the most sense when the fund owns substantial unrealized value but does not want, or cannot, immediately monetize those investments.
Common uses include:
The economic rationale should be clear.
For example, assume a PE fund owns a portfolio company that needs USD $20 million to complete a highly strategic acquisition.
Selling another portfolio company quickly to generate that USD $20 million may destroy value.
Calling additional capital may not be possible.
A NAV facility could potentially provide the required liquidity while giving the fund more time to exit assets according to its investment plan.
That is fundamentally different from borrowing simply to make reported distributions look stronger.
The Institutional Limited Partners Association's NAV-facility guidance specifically identifies LP concerns around transparency, governance and the use of NAV facilities for distributions. ILPA recommends LPAC engagement where the LPA does not expressly permit the facility and recommends LPAC consent for NAV borrowing used to fund distributions regardless of the LPA language.
ILPA's guidance is specifically directed at private equity strategies. It should not automatically be applied as a rulebook for private credit funds.
Because the underlying collateral is different.
A PE NAV lender is usually looking at equity interests in operating businesses.
A private credit fund may own dozens or hundreds of loans that themselves generate contractual interest and principal payments.
That creates a financing structure closer to asset-based lending or portfolio back leverage.
Macfarlanes explains that private-credit NAV facilities may use detailed eligibility rules, concentration limits, payment waterfalls and borrowing-base mechanics similar to other forms of collateralized lending. (Macfarlanes)
For a private credit fund, the lender may examine each underlying loan for factors such as:
A performing senior secured loan may receive borrowing-base credit.
A defaulted loan may receive none.
A loan to a borrower in an industry already exceeding the facility's concentration limit may also be excluded or haircut.
That makes a private-credit NAV facility conceptually similar to the borrowing-base logic used in traditional asset-based finance. For Canadian context on that underwriting concept, Mehmi's asset-based lending guide explains why gross asset value and eligible borrowing-base value are rarely identical.
Start with eligible portfolio value.
Then reduce it for assets the lender considers less reliable, too concentrated or difficult to monetize.
A PE borrowing base might begin with the lender-accepted NAV of eligible portfolio companies.
Adjustments may be made for:
Private-credit borrowing bases can be even more granular.
Mayer Brown and Macfarlanes both describe private-credit structures in which eligibility criteria, concentration limits and advance rates govern how much of a loan portfolio counts toward available financing. (Mayer Brown)
The result is a critical number:
Eligible NAV is not necessarily reported NAV.
Fund managers should model the facility using the lender's methodology, not the latest investor reporting value.
The lender underwrites both the fund structure and the assets.
For private equity, expect scrutiny of:
The analysis is similar in principle to private credit generally: the lender needs capacity, collateral and a credible repayment path. Mehmi's private credit in Canada guide provides additional background on those underwriting concepts for Canadian transactions.
For a private credit fund, underwriting moves deeper into the loan portfolio itself.
The lender may require loan-level data covering balances, yields, maturities, industries, underlying borrowers, defaults, PIK components, ratings or internal risk grades.
This can become operationally intensive.
A fund with clean standardized portfolio data is much easier to finance than one requiring the lender to rebuild its loan book from spreadsheets and inconsistent servicing information.
There is no single universal security structure.
Depending on the fund architecture, security can potentially include:
Direct security over individual portfolio-company shares is not always practical.
Shareholder agreements, change-of-control provisions, other lenders or regulatory restrictions may prevent or complicate pledges and enforcement.
That makes legal diligence central to NAV financing.
For Canadian transactions where the security package intersects with existing secured creditors, concepts such as lien priority, intercreditor agreements and enforcement rights become relevant. Mehmi's first-lien versus second-lien financing guide provides a Canadian operating-company perspective on why priority cannot be assumed simply from the amount of collateral.
U.S. and Canadian fund structures should be reviewed separately by fund counsel. Partnership law, perfection, security over fund interests, tax consequences and enforcement can depend on the entities, asset jurisdictions and governing documents involved.
Loan-to-value is usually one of the central controls.
A simplified NAV LTV calculation is:
NAV debt ÷ eligible NAV
If the facility has USD $75 million outstanding against USD $750 million of eligible NAV, the LTV is 10%.
But the real documents are usually more complex.
Potential protections include:
A NAV facility should also avoid creating a refinancing problem after the fund has entered its harvesting period.
The closer the debt maturity gets to the end of the fund's life, the more important the exit assumptions become.
The same credit principle applies to bridge financing more generally: temporary debt requires an identifiable takeout. Mehmi's Canadian guide to cash flow, collateral and exit in bridge lending illustrates that principle at the operating-company level.
This is one of the most debated use cases.
Suppose a PE fund owns several strong companies but the exit market is unattractive.
LPs want liquidity.
The GP can:
NAV debt may let the GP avoid selling a quality asset solely to generate short-term liquidity.
But the distribution is funded with debt.
The fund has not actually realized the underlying investment.
LPs therefore need to understand that the cash distribution is accompanied by a liability sitting against remaining portfolio value.
ILPA's guidance recommends clear disclosure of the rationale, facility terms and conflicts associated with NAV financing, and it gives special attention to facilities used to finance distributions.
That transparency is important because fund-level leverage can change the timing and risk profile of reported returns.
When putting additional leverage directly on the portfolio company would be less efficient or unavailable.
A fund may own five companies but only one can safely take additional debt.
A NAV facility can potentially borrow against portfolio diversification rather than concentrating the new obligation entirely inside that one company.
The opposite can also be true.
If one portfolio company needs permanent financing for an acquisition, it may be more appropriate to finance the acquisition at that company rather than encumber the entire fund portfolio.
For Canadian portfolio-company transactions, Mehmi's M&A financing guide explains how senior debt, seller capital and equity can be structured at the operating-business level.
The correct financing location matters.
Fund-level debt should not automatically replace asset-level debt just because the fund has unused NAV capacity.
Potentially.
A NAV loan is only one way to create liquidity.
Depending on the requirement, alternatives can include:
In Canadian structured transactions, Mehmi's mezzanine financing guide explains the broader senior-versus-junior capital-stack principle, while its alternative financing guide covers why the financing product should match the underlying liquidity problem.
The same principle applies to a fund.
Do not choose NAV debt first and then invent a use for it.
Identify the liquidity problem first.
Assume a North American private equity fund has USD $1 billion of reported portfolio NAV.
After lender eligibility adjustments and concentration haircuts, only USD $800 million qualifies as eligible NAV.
The fund wants an USD $80 million NAV facility, producing an initial LTV of:
USD $80 million ÷ USD $800 million = 10%
Assume, solely for illustration:
Annual cash interest would equal USD $7.6 million.
Quarterly interest payments would equal USD $1.9 million.
If the full USD $80 million remained outstanding for three years, cash interest would total USD $22.8 million.
The 1.5% upfront fee would equal USD $1.2 million.
Including principal repayment, interest and the assumed fee, total cash outflow through maturity would equal USD $104 million, excluding legal, diligence, administration, hedging, commitment, unused-line and other potential costs.
Now assume eligible NAV falls from USD $800 million to USD $500 million while the full facility remains outstanding.
LTV increases from 10% to 16% even though the fund has not borrowed another dollar.
That is the central NAV-financing risk.
The debt is fixed.
The collateral value is not.
This example is illustrative only and is not a Mehmi Financial Group financing offer or indication of available market pricing.
The biggest risk is leverage on leverage.
The fund borrows against investments.
Those investments may themselves contain debt.
A portfolio-company downturn can therefore reduce equity NAV while operating-company debt remains outstanding, causing fund-level LTV to deteriorate rapidly.
For private credit funds, Moody's highlighted this broader leverage-on-leverage issue in 2026 and stressed the importance of underwriting and stress testing as NAV financing expands. (Reuters)
Other risks include:
NAV finance should improve flexibility.
It should not become the reason the GP cannot control the timing of its exits.
A fund should be cautious where repayment depends primarily on optimistic future valuations rather than identifiable liquidity.
Warning signs include:
Sometimes the better decision is to sell an asset, raise equity, reduce the follow-on investment or wait.
For an existing financing problem rather than a new liquidity opportunity, the first question should be whether the transaction is truly a refinance. Mehmi's guide to how refinancing works provides the basic discipline: new capital should fix the underlying structure rather than simply move the maturity date.
A lender-ready package should make the portfolio understandable quickly.
Expect to prepare:
Private credit funds should also be prepared to provide detailed loan-level data.
The quality of that information can materially affect the financing process.
No. Subscription facilities are primarily underwritten against uncalled investor commitments. NAV facilities are primarily underwritten against existing portfolio value and investment cash flows.
Potentially, subject to their governing documents, lender terms and applicable requirements. However, distribution-funded NAV borrowing is more sensitive from an LP-governance perspective. ILPA recommends LPAC consent for PE NAV facilities used for distributions.
Yes. Private credit funds are significant users of fund-level leverage, but the structure can look more like an asset-backed borrowing base against a portfolio of loans than a traditional PE NAV facility.
The fund's LTV increases. Depending on the documents, a decline can trigger a borrowing-base deficiency, cash sweep, restrictions on distributions, mandatory repayment or an event of default if the issue is not cured.
Not necessarily. The security and enforcement package varies. A lender may instead have security over an intermediate holding company, fund distributions, controlled accounts or investment proceeds.
No. It is often associated with more mature PE funds after uncalled commitments decline, but private credit funds can establish portfolio financing earlier because the loan portfolio itself can support a borrowing base.
Potential repayment sources include portfolio-company distributions, investment realizations, scheduled loan collections in a private-credit portfolio, refinancing or other fund cash flows. The credible repayment source should be identified before borrowing.
Not necessarily. Maximum borrowing capacity and prudent leverage are different numbers. The fund should stress-test valuation declines, portfolio-company leverage, interest costs, concentration and exit delays before deciding how much to draw.
For a private equity, private credit or other investment fund considering NAV-based financing, prepare the financing amount, U.S. or Canada, fund and vehicle jurisdictions, current NAV, eligible portfolio composition, existing fund and portfolio leverage, use of funds and desired timing.
Mehmi Financial Group operates as a financing brokerage and intermediary rather than a direct lender. For large or specialized transactions, Mehmi can review the capital requirement and determine whether institutional, private-credit, asset-based or other specialty financing sources may be relevant. Final structure, underwriting, pricing and approval remain with participating capital providers.
Call 833-863-4644 or use the Mehmi Financial Group contact page to discuss the transaction.
.svg){kind=small}