Introduction
The number many limited partners (LPs) hoped to find in the Institutional Limited Partners Association's (ILPA) July 2024 guidance on net asset value (NAV) facilities is missing. The document explains when a general partner (GP) should seek consent and what it should disclose, but declines to recommend a maximum amount of fund-level leverage: the limit belongs in each fund's negotiation, provided one exists. The market supplies a reference point instead. The Financial Stability Board (FSB) reported in its May 2026 review of private credit vulnerabilities that member data suggest loan-to-value (LTV) ratios on NAV facilities are generally limited to 30%. Below that ceiling, the negotiated terms (covenants, sweeps, and recall rights) decide who absorbs a fall in marks, and they are what a private capital advisory (PCA) team negotiates.
The Terms That Set a NAV Facility's Risk
The collateral and ranking barely vary: equity in holding vehicles and the accounts distributions flow into, senior to the LPs and behind each company's own lenders, as the fund finance map explains. The term sheet is where deals differ, and four numbers carry most of the risk: the LTV at inception, the maximum LTV, the margin, and the maturity.
Eligibility, Concentration, and Valuation
The lender does not lend against all of NAV. It agrees a list of eligible assets, a valuation method, and concentration tests, because a facility secured on four companies behaves differently from one secured on twenty; ILPA's disclosure template lists portfolio diversification beside the LTV and coverage ratios. Debt already on a company, or a consent that cannot be obtained, shrinks what can be pledged. Negotiations also turn on valuation rights: which events trigger an interim revaluation, and whether the lender can challenge the sponsor's marks.
- LTV Covenant (NAV Facility)
A maintenance test comparing the outstanding NAV loan with the value of the eligible portfolio collateral. Breaching the agreed maximum typically triggers remedies such as mandatory repayment, a cash sweep, higher pricing, or ultimately an event of default, even if no interest payment has been missed.
Because it is tested on marks, the covenant works like the tests in this primer on maintenance and incurrence covenants: a markdown alone can put the fund in breach.
Pricing, Tenor, and How Interest Is Paid
Pricing depends on the lender and the recourse. The FSB's table of bank facilities to private credit funds puts NAV financing at around 200 to 400 basis points over benchmark rates, with tenors of three to five years. Rede Partners' June 2026 survey of NAV lenders, alternative lenders included, found margins had stabilised in a 4% to 7% range. Banks lean toward scheduled amortization and sweeps, alternative lenders toward looser repayment with ticking fees on delayed draws. Interest can be paid in cash or as paid-in-kind (PIK) interest added to the loan, and ILPA asks GPs to say which.
| Term | What it sets | Why LPs care |
|---|---|---|
| LTV at inception | Loan size against eligible NAV | Headroom before a breach |
| Maximum LTV | The trigger for sweeps, repayment or default | How deep a markdown the fund can absorb |
| Eligibility and concentration | Which companies count, and how much each can | A few large assets can shrink the base |
| Interest form | Cash pay or PIK | Whether cost compounds unseen |
| Maturity and amortization | When principal must be repaid | Pressure to sell on the lender's timetable |
When the LTV Test Is Breached
A facility can fall out of compliance without any company failing: marks drop, PIK interest grows the loan, or an exit removes a large asset from the base. ILPA describes the standard responses, partial or full repayment or a sweep of portfolio cash until the ratio is back within its limit, which makes the cure terms heavily negotiated.
- Cash Sweep (NAV Facility)
A requirement that some or all cash from portfolio realizations and income repay the facility instead of being distributed to investors. Sweeps may run for the facility's whole life or switch on, or increase, once the LTV reaches an agreed level.
Escalation usually follows a set order:
Test date
The lender recalculates LTV on the latest valuation, or on an event-driven revaluation where the agreement allows.
Cure window
The fund pays down the loan or accepts other remedies, such as a higher margin, within the agreed period.
Sweep
Realizations and portfolio income go to the lender until the ratio is back under the limit.
Recall
If the facility funded a recallable distribution, the GP can call that cash back from LPs.
Default remedies
The lender can take realization proceeds, require a monetization plan, or enforce on the pledged holding-vehicle equity.
The last step is why ILPA flags cross-collateralization: enforcement can reach strong companies to cover weak ones, even forcing a sale, although lenders told ILPA full foreclosure is rare and refinancing the usual outcome.
Debt-Funded Distributions: DPI Without a Realization
A NAV-funded distribution raises distributions to paid-in capital (DPI) with nothing sold, as reading a fund track record introduces; the cost appears later, in total value to paid-in capital (TVPI) and the internal rate of return (IRR).
The Arithmetic of Borrowed DPI
Take an illustrative fund, figures in millions of dollars. LPs paid in 400 at the start and received 100 in year three; in year four the portfolio is marked at 560. The GP borrows 70, an LTV of 12.5%, at an all-in 9% paid in kind, and distributes it. The portfolio is sold for 640 in year six.
| Illustrative fund | No facility | With facility |
|---|---|---|
| DPI in year four | 0.25x | 0.43x |
| TVPI in year four | 1.65x | 1.65x |
| Repaid to lender at exit | 0 | 83 |
| Final TVPI | 1.85x | 1.82x |
| IRR on the cash flows shown | 11.8% | 11.9% |
DPI jumps 0.18x with no realization. TVPI ends 0.03x lower, the 13 of interest, and IRR edges up only because the loan costs less than the fund earns. ILPA adds that facility costs are often partnership expenses, so every LP pays, including those who wanted no early cash.
Recallability and the Downside Case
ILPA notes NAV-funded distributions are often recallable: if the facility falls out of LTV compliance, the GP can call the money back to pay the lender. Suppose the fund's marks fall by a third a year after the draw, to about 373, while PIK lifts the loan to about 76. LTV is now about 20.4%, above an illustrative 20% maximum, and with no exits the sweep catches nothing. Recalling about 30 of the 70 restores roughly 12.4%. An LP that spent the cash must find it again, which is why a recallable distribution is tracked as unfunded commitment. A buyer of the interest inherits the recall exposure, one reason facility leverage lowers bids in pricing LP interests.
ILPA's July 2024 Guidance in Depth
The guidance covers private equity funds borrowing asset-based debt at fund level, excluding secondaries, private credit, and closed-end real estate funds. It is best practice, not law: the limited partnership agreement (LPA) governs. Its central position is that a NAV facility is fund-level leverage and counts toward borrowing limits even when a special purpose vehicle (SPV) below the fund borrows.
Consent and the LPAC
Two questions drive consent: does the LPA explicitly permit NAV facilities, and will proceeds fund a distribution? Where the LPA is silent and no prior consent exists, the GP should seek approval from the limited partner advisory committee (LPAC) before any facility. A distribution use needs LPAC approval regardless of LPA language; portfolio support in a fund already permitted needs only notice to the LPAC and disclosure to all LPs. Any conflict of interest, such as a related-party lender, goes to the LPAC or LPs whatever the documents say.
A request should set out the rationale and alternatives considered (company-level financing, portfolio sales, continuation funds), size, structure, economic terms, and new LP obligations. LPs wanting cash, ILPA notes, may do better selling or borrowing themselves.
Disclosure Items and Future LPA Language
Once a facility is in place, ILPA asks GPs to give every LP standardized disclosures:
- Rationale versus alternatives, and why capital is needed now.
- Size, amount drawn, and LTV at first borrowing.
- Interest: fixed or floating, spread, cash or PIK, plus tenor and repayment source.
- Structure, SPVs, security, and any pledge of uncalled capital.
- Covenants, sweeps, and mandatory repayments, plus any rating, lender conflicts, and consents obtained.
ILPA's sample LPA language defines a NAV-based facility to include borrowing or preferred equity financing at the partnership or a borrowing subsidiary, secured on all or substantially all of the fund's assets, so the preferred equity structures offered as alternatives still count against the cap.
LP Pushback and Where the Advisor Fits
In Coller Capital's Summer 2024 Global Private Capital Barometer, a survey of 110 investors in February and March 2024, 57% were not comfortable with the use of NAV finance, 36% were comfortable except in particular circumstances, and 7% were happy for GPs to use it freely. Funding add-on acquisitions was the most accepted use (37%) and bolstering portfolio company balance sheets the least (23%); recallable distributions concerned 76%. ILPA shares the suspicion of defensive use by a GP struggling to raise its next fund. An advisor on a NAV mandate therefore builds the LPAC package, shows DPI, TVPI, and IRR with and without the facility, and negotiates cure periods, sweeps, and recall terms that fit the fund's exit calendar.
The LPs are the borrowers in everything but signature: they receive the cash, bear the interest, and may have to return the distribution, yet the fund or its SPV signs the loan. ILPA's guidance asks that the party carrying those costs be consulted first.
