NAV Loans: How PE Funds Borrow Against Portfolios

Introduction

Private equity spent the early 2020s in a strange bind. Funds were sitting on portfolios worth enormous sums on paper, but the exit market had frozen: deals were not closing, IPOs were scarce, and the cash that normally flows back to investors slowed to a trickle. Limited partners, the pensions and endowments that fund private equity, were starved of distributions and could not recycle capital into new funds. Into that gap stepped one of the most debated financial instruments of the decade: the NAV loan.

A NAV loan lets a private equity fund borrow against the value of its whole portfolio at once, rather than against any single company. Used well, it is a flexible liquidity tool that can support portfolio companies or fund growth without selling assets at the bottom of a cycle. Used aggressively, particularly to manufacture distributions, it has drawn sharp criticism from the very investors it is meant to serve, and prompted formal guidance from the industry's main LP association. This post explains what NAV loans are, how they differ from the subscription lines funds have used for years, why they exploded, what GPs actually use them for, how they are structured, the controversy in detail, the 2024 ILPA guidance, how they reshape returns, and the risks. If you want the foundation first, our guide to the private equity fund structure explains the GP and LP relationship this all sits on.

A NAV loan is fund-level debt secured by the net asset value of a private equity fund's underlying investments. Instead of a loan to one portfolio company, secured by that company's assets and cash flows, a NAV facility sits at the level of the fund itself and is backed by the value of the entire pool of holdings. The lender effectively takes comfort from the diversified portfolio: even if one or two companies struggle, the loan is small relative to the whole.

NAV Loan

A financing facility extended to a private equity (or other private markets) fund, secured against the net asset value of the fund's entire portfolio of investments rather than a single company. Proceeds can be used to support portfolio companies, fund follow-on acquisitions, or return capital to investors. It is a form of fund-level leverage that sits on top of any debt already held at the individual portfolio companies.

NAV loans typically appear in the middle to later years of a fund's life, often between years four and nine, once the manager has drawn most investor commitments and built a diversified portfolio. By that stage the fund has real, marked assets to borrow against, but may not yet be able to sell them on acceptable terms. That timing is central to understanding why the tool became so popular when exits dried up.

Private equity funds have two main types of fund-level financing, and candidates routinely confuse them. The older and more familiar one is the subscription line.

Subscription Line (Capital Call Facility)

A short-term revolving credit facility secured by the unfunded capital commitments of a fund's limited partners. Funds use it to bridge the gap between making an investment and calling cash from investors, smoothing operations and reducing the number of capital calls. It is secured by LPs' promises to fund, not by the portfolio itself, and is generally repaid quickly.

The two facilities differ in what secures them, when in the fund's life they are used, and what they are for. A subscription line is backed by investors' unfunded commitments and is used early, when there is little portfolio to borrow against. A NAV loan is backed by the portfolio's value and is used later, once commitments are largely drawn.

Both tools can flatter the internal rate of return by delaying or replacing investor cash, which is part of why both attract scrutiny. But the subscription line is long-established and largely accepted, while the NAV loan is newer, larger, and far more contentious.

The driver was a liquidity squeeze across private equity. After a decade of easy exits, rising rates and uncertain markets slowed M&A and shut the IPO window for long stretches, so managers held investments longer and returned less cash. McKinsey's 2025 global private markets report documented the slump in distributions and the resulting strain on the whole capital-recycling machine.

That strain matters because private equity runs on a cycle: LPs receive distributions from old funds and commit that capital to new ones. When distributions stall, LPs have less to commit, fundraising suffers, and GPs feel pressure to get cash back to investors somehow. Selling good assets into a weak market is unappealing, and calling more capital is often impossible. A NAV loan offered a third path: borrow against the portfolio and distribute the proceeds, without selling anything.

The result was explosive growth. Industry estimates put the NAV loan market around $100 billion of facilities, with projections, such as those from the Fund Finance Association, that it could reach $600 billion by 2030. A tool that was once a niche product used in secondaries and infrastructure became a mainstream feature of buyout funds.

NAV lending did not start in buyout. Its early home was in secondaries funds and funds of funds, vehicles holding diversified, well-marked portfolios of fund stakes that were natural collateral for a loan against net asset value. It then spread to infrastructure and private credit, asset classes built on stable, cash-generating holdings where a modest loan against the portfolio carried little risk. In those settings, NAV financing was uncontroversial: the assets threw off cash, the leverage was conservative, and the use was usually to fund growth or smooth operations.

The migration to traditional buyout funds is what changed the conversation. Buyout portfolios are concentrated in companies that already carry significant acquisition debt, so a fund-level NAV loan stacks leverage on leverage in a way that a diversified secondaries portfolio does not. When the exit drought pushed buyout managers toward NAV loans, and toward using them for distributions rather than growth, a quiet corner of fund finance became one of the most scrutinized practices in the industry.

The uses fall into three broad categories, and the controversy attaches almost entirely to the third.

Defensive: Supporting the Portfolio

A fund can use NAV financing to inject capital into struggling portfolio companies, refinance looming maturities, or provide a cushion through a downturn, without calling more money from investors or selling at a low. Used this way, the loan is genuinely defensive: it protects value the LPs already own.

Offensive: Funding Growth

NAV loans can finance follow-on or add-on acquisitions, letting a manager pursue value-creating deals across the portfolio without a capital call. In a roll-up strategy, this can accelerate growth while the fund's commitments are already largely deployed. This use is the easiest to defend, because the borrowing funds something that can grow the portfolio's value rather than simply moving cash around. If a NAV loan finances an add-on that lifts a company's earnings and eventual exit multiple, the return on that capital can comfortably exceed the loan's interest cost, leaving LPs genuinely better off.

Distributions: The Controversial Use

The flashpoint is using a NAV loan to fund distributions to LPs. Rather than waiting for exits, the GP borrows against the portfolio and sends the cash back to investors, generating distributions in a year when none would otherwise occur. This boosts the fund's distributions-to-paid-in ratio and its IRR, which can matter enormously when the GP is trying to raise its next fund.

DPI (Distributions to Paid-In)

A performance metric equal to the cash a fund has actually returned to investors divided by the capital they have paid in. Unlike IRR, it ignores time and unrealized marks, measuring real cash returned. Because DPI is hard to manipulate with paper gains, LPs prize it, which is exactly why using borrowed money to lift it is so contentious.

NAV facilities are deliberately conservative in their loan-to-value, because the lender is relying on the portfolio's marked value, which can fall. Loan-to-value ratios typically run from the low single digits up to around 25%, with some specialist lenders going somewhat higher. The lender sits senior at the fund level and is usually cross-collateralized across the whole portfolio, with covenant headroom designed to absorb meaningful declines in NAV before the loan is impaired.

Loan-to-Value (LTV)

The ratio of the loan amount to the value of the assets securing it. For a NAV loan, it compares the facility size to the fund's net asset value.

The LTV is simply:

Pricing reflects the bespoke, fund-level nature of the risk: margins commonly run several hundred basis points over a base rate, often in the range of roughly 550 to 750 basis points over the reference rate, putting all-in costs well into the high single digits or low double digits depending on the environment. The lender base has broadened from specialist providers such as 17Capital to banks and large credit managers, all drawn by the growth of the market. This sits alongside the broader expansion of private credit and direct lending, which has supplied much of the capital.

The security package and covenants are what make the low LTV meaningful. The lender typically takes a pledge over the cash distributions flowing up from the portfolio and over the equity in the holding entities through which the fund owns its companies, rather than direct liens on the operating businesses. The central covenant is an LTV maintenance test: if the portfolio's marked value falls far enough that the loan exceeds an agreed percentage of NAV, the borrower must cure the breach, often by paying down the loan or posting more collateral. Facilities usually include cure rights and are structured with limited recourse to the fund's assets rather than to the LPs personally. Because the loan sits senior to LP equity, the investors absorb losses only after the lender is made whole, which is why lenders can lend against a concentrated, illiquid portfolio at all.

Put end to end, the facility follows a clear lifecycle from fund formation to repayment:

It helps to see why lenders find NAV loans attractive, because that explains the market's rapid growth. A NAV lender is, in effect, making a low-LTV loan against a diversified pool of private companies, sitting senior to a large equity cushion. Even if several holdings underperform, the portfolio as a whole must fall dramatically before the loan is impaired, which gives the lender substantial protection. In exchange, the lender earns a yield well above traditional senior debt, often in the high single digits or more, for what it views as well-protected risk.

That risk-reward profile drew a widening field of capital. The category was pioneered by specialists such as 17Capital, but banks, insurers, and large alternative-asset managers have since built dedicated NAV-lending capabilities, treating it as a distinct private credit strategy. The irony is that some of the same large managers raising buyout funds are now on the other side, lending to peers, which adds yet another layer to the conflicts the practice raises. For the lender, the appeal is straightforward: attractive, defensively positioned yield in an asset class with a structural tailwind.

A concrete walkthrough makes the mechanics tangible. Picture a buyout fund in year six of its life, holding ten companies marked at a combined $1 billion, with the original investor commitments largely deployed and the subscription line long since repaid. Exits have stalled, LPs are pressing for distributions, and selling good companies into a soft market would mean leaving value on the table.

The GP arranges a $120 million NAV facility, a 12% LTV, priced at a high-single-digit to low-double-digit all-in rate. It uses $70 million to fund a strategic add-on acquisition for one of its strongest companies, avoiding a capital call, and distributes the remaining $50 million to LPs. The fund services interest from portfolio cash flows over the next few years. When two companies are eventually sold in years eight and nine, the proceeds first repay the $120 million facility plus accrued interest, and the rest flows to investors. If those exits realize strong values, the add-on may have created more than enough to justify the cost; if they disappoint, the interest paid and the extra leverage will have eaten into LP returns. The outcome, in other words, hinges entirely on whether the borrowed money was put to productive use.

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The debate is not really about whether NAV loans should exist, but about how they are used and disclosed. Several concerns recur.

Manufacturing IRR and DPI. Because IRR rewards getting cash back sooner, a NAV-funded distribution can lift a fund's headline IRR and DPI even though no asset was sold and no value was crystallized. When this happens just before a GP markets its next fund, LPs reasonably worry that the numbers are being engineered.

A second layer of leverage. Portfolio companies in a buyout fund already carry significant debt. A NAV loan adds fund-level leverage on top of that company-level debt, so the fund's investors are now exposed to two stacked layers of borrowing. In a downturn, those layers compound losses.

Recallable distributions and LP planning. Because NAV-funded distributions are frequently recallable, they disrupt the way LPs plan their own cash flows and commitments. An LP that treats the distribution as permanent and commits it elsewhere can be caught out if the capital is later recalled, and there can be tax complications too.

Transparency. Perhaps the loudest complaint is that LPs often do not know a NAV loan has been used, on what terms, or why. As Bloomberg has reported, investor pushback grew sharp enough that some managers began pulling back from the riskiest uses, and LPs started inserting thousands of NAV-related provisions into side letters.

In 2024, the Institutional Limited Partners Association, the main body representing LPs, issued formal guidance on NAV-based facilities in response to member concerns that the loans were being used in ways that left investors unaware of the costs and risks.

The guidance does not ban NAV loans, and it acknowledges legitimate defensive and growth uses. Its thrust is that investors should know when fund-level leverage is being used, understand the cost, and have a say when it is deployed to generate distributions. The market response has been a wave of side-letter provisions and more careful documentation, even as the underlying market keeps growing.

Beyond ILPA: The Regulatory Backdrop

It is worth noting where formal regulation sits, because candidates sometimes assume a hard rulebook governs this. The US Securities and Exchange Commission finalized a set of private fund adviser rules in 2023 aimed at greater transparency around fees, conflicts, and practices like these, but a federal appeals court struck them down in their entirety in 2024. As a result, the binding pressure on NAV-loan practices comes less from a specific federal rule and more from investors themselves, channeled through ILPA's guidance, side-letter negotiations, and the simple discipline of LPs who can decline to commit to a manager's next fund. In private markets, the LPs are often the most effective regulator.

The returns effect is where the technical interest lies, and it explains the whole IRR-versus-DPI tension. Borrowing to distribute early pulls cash back to investors sooner, which raises the time-weighted IRR, but the interest cost leaks value out of the fund, which lowers the absolute multiple of money returned. Understanding both metrics is essential, and our guide to IRR versus MOIC breaks down why they can diverge.

This is precisely why LPs focus on DPI and the absolute multiple, not just IRR. A GP can improve the optics that drive fundraising while leaving investors marginally worse off in true dollars, which is the heart of the conflict of interest the ILPA guidance targets. The same tension shows up in other liquidity tools, such as continuation funds and dividend recapitalizations, both of which return cash without a clean third-party sale.

A NAV loan is one option among several that GPs reach for when exits are slow, and a strong candidate can place it in context. Each tool solves the same problem, getting cash to LPs or supporting the portfolio without a normal sale, but with different mechanics, costs, and trade-offs.

The contrasts are instructive. A continuation fund actually moves an asset into a new vehicle and resets the clock, a more involved transaction than a loan. An LP-led secondary puts the liquidity decision in the hands of an individual investor, who sells its stake, often at a discount, rather than the GP borrowing for everyone. A dividend recap raises leverage at the portfolio-company level rather than the fund level, a distinction worth keeping straight. NAV loans are attractive precisely because they are fast and discreet and do not require selling or restructuring anything, which is also why they invite the most criticism.

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Beyond the conflicts, NAV loans carry real structural risks that matter in a downturn.

For the investors on the other side, the right response is not blanket opposition but informed scrutiny. A NAV loan used to support a promising add-on is very different from one used to paper over a weak fund with a borrowed distribution, and the difference shows up in the answers to a handful of questions.

The broader point is that NAV loans are a test of GP-LP alignment. A manager who uses them sparingly, discloses them fully, and seeks consent is behaving very differently from one who quietly borrows to flatter a track record. Sophisticated LPs increasingly evaluate not just the loan but what its use reveals about the manager.

The forces that created the NAV-loan boom have not gone away. Even as exit markets thaw, the structural pressure to return cash to LPs remains, the asset class has built a deep and willing lender base, and the projected growth toward $600 billion by 2030 reflects genuine demand rather than a passing fad. At the same time, LP scrutiny and the ILPA guidance are pushing the market toward more disciplined, better-disclosed use. The likely path is bifurcation: defensive and growth uses become a normal, accepted part of fund finance, while borrowing to manufacture distributions stays controversial and increasingly constrained by side letters and consent requirements. NAV loans are not going away; they are being domesticated.

NAV loans are increasingly fair game in private equity interviews, precisely because they sit at the intersection of fund economics, leverage, and the current state of the market.

Connecting NAV loans to the broader liquidity toolkit, alongside continuation funds and the wider menu of PE exit strategies, shows you understand why these structures all emerged from the same exit drought.

NAV loans are a genuinely useful financial tool that became a lightning rod because of how some managers used them. At their best, they let a fund weather a closed exit window, support its companies, and fund growth without dumping assets at the bottom. At their worst, they let a manager borrow against investors' own portfolio to manufacture distributions, flatter the metrics that drive the next fundraise, and quietly stack a second layer of leverage that magnifies losses if markets turn.

The instrument itself is neutral; the judgment is in the use, the disclosure, and the alignment between GP and LP. That is why the 2024 ILPA guidance focused on consent and transparency rather than prohibition, and why a sharp candidate should be able to argue both sides. Understand the mechanics, distinguish a NAV loan from a subscription line, and be ready to explain why returning investors their own borrowed money can look like performance while leaving them marginally worse off. Be ready, too, to argue the constructive case: that the same tool, used for growth and disclosed honestly, can leave everyone better off. Get that far, and you will be discussing one of the defining private equity debates of the decade with real fluency.