NAV Loans in Private Equity: How Fund-Level Financing Works, and the DPI Controversy LPs Need to Watch

A NAV loan is a line of credit that a private equity fund borrows against the current value of the companies it already owns, not against the money its investors still owe. The market has grown to roughly $100 billion as of 2024 and could hit $600-700 billion by 2030, according to ILPA's July 2024 guidance citing the Fund Finance Association. If you are an LP, you need to know what that borrowed cash is actually funding before you sign the next capital call.

I want to start with a definition, because this term gets thrown around loosely at LP advisory committee meetings. NAV stands for net asset value. It's the fund's estimate of what its portfolio companies are worth right now, marked quarter over quarter. A NAV loan (also called a NAV facility or NAV-based financing) is debt secured by that portfolio value. The fund, not the investor, is the borrower. The lender looks at the equity stakes the fund holds in its companies and lends against a slice of that value.

This is different from a subscription line of credit, which I covered in AIN's piece on how subscription lines distort IRR. A subscription line borrows against LP commitments, the promise to pay, not the portfolio itself. NAV loans show up later in a fund's life, once there's an actual portfolio to lend against. The instinct is the same, use debt to smooth the fund's cash flow, but the collateral base and the risk profile are completely different. Confusing the two is the first mistake I see LPs make when a GP mentions "the facility" on a call.

How NAV Loans Actually Work

The mechanics are simpler than the structuring documents make them look. A GP sets up a special purpose vehicle, sometimes two layered on top of each other, that holds the fund's interests in its portfolio companies. A specialist lender extends credit to that vehicle, secured by the value of those holdings. The fund draws down what it needs, whether that's paying a bill, funding a follow-on investment, or sending cash back to LPs, and repays the loan later from proceeds when it eventually sells the underlying companies.

Loan-to-value ratios stay conservative by design. Buyout fund NAV loans typically run in the 10-25% LTV range, though specialist lender 17Capital, the firm widely credited as the pioneer of this financing category, will go up to roughly 30% LTV in select cases. That's well above what a traditional bank lender would touch, since most banks stick to single-digit LTVs when they even offer this product. Pricing sits at SOFR plus 200 to 650 basis points, depending on the fund's vintage, sector concentration, and the lender's read on how liquid those underlying companies actually are.

The lender base looks different from your typical bank syndicate. 17Capital has raised more than $24 billion for this strategy and closed a credit fund at a EUR2.6 billion hard cap back in 2022. Firms like Pemberton, Crestline Investors, and Hark Capital have built specialist books around NAV financing too. This is not commercial banking. It's a private credit strategy built specifically to lend against illiquid fund portfolios, and the lenders price for the illiquidity and the difficulty of verifying marks in real time.

The market's growth curve tells you something on its own. Haynes Boone's 2026 Fund Finance Annual Report pegs the broader fund finance market at $1.25 to $1.75 trillion, with 2025 setting a record for NAV deal volume specifically. Rede Partners' 2025 survey found average NAV facility volume per lender jumped 142% year over year, from EUR330 million in 2023 to more than EUR800 million in 2024. This product went from a niche workaround to a standard tool in five years.

Why GPs Reach for a NAV Loan

Three reasons show up again and again, and I'll give you each one straight.

Liquidity without a forced sale. A fund holding a strong company in a weak exit market has a problem: sell now at a discount, or hold and wait. A NAV loan lets the GP borrow against the value that's already there instead of selling into a bad market. That's a legitimate use. Nobody wants a general partner dumping a good asset at a bad price just to hit a distribution target.

Extending the fund's runway. Follow-on capital for portfolio companies, working capital during a slow M&A cycle, or bridge financing while a sale process plays out. A NAV facility can fund all of it without going back to LPs for a capital call. According to the Fund Finance Association data cited in ILPA's guidance, roughly 80% of NAV-based facility usage supports portfolio companies through follow-ons and reinvestment. That's the "boring," defensible use case, and it's the majority of the market.

Manufacturing DPI. Here's where I slow down, because this is the part that should make every LP pay closer attention. DPI, distributions to paid-in capital, is the ratio LPs use to judge whether a fund has actually returned real cash, as opposed to paper gains sitting in unrealized marks. A GP raising a new fund wants a strong DPI story to show prospective LPs. If the current fund hasn't generated enough real exits, a NAV loan lets the GP borrow against portfolio value and distribute that borrowed cash to LPs as if it were a realized gain.

The remaining roughly 20% of NAV facility usage, funding LP distributions rather than reinvestment, is where this controversy lives. Vista Equity Partners, led by Robert Smith, secured a $1.5 billion NAV loan in 2023 against its Fund VII portfolio specifically to fund LP distributions rather than force exits in a difficult market. It's a widely cited example precisely because it shows both sides of the argument in one transaction: a rational response to a bad exit environment, and a DPI number that got a lift from debt rather than a liquidity event.

I'm not saying every GP doing this is trying to fool anyone. Sometimes it's the sensible move. But the DPI number on the tearsheet doesn't tell you whether it came from a sale or a loan. That distinction matters enormously, and most LP reporting doesn't force the GP to make it obvious.

The Controversy: What ILPA Is Warning About

The Institutional Limited Partners Association didn't publish formal guidance on NAV facilities in July 2024 because everything was fine. Jennifer Choi, ILPA's CEO, and her team put out that guidance because LPs kept discovering NAV facilities in fund financials after the fact, not before the GP drew on them. The core problems ILPA flagged:

Disclosure gaps. Many limited partnership agreements written before NAV loans became common don't require GP consent from the LP advisory committee before a fund takes one out. The GP can layer debt onto the fund's entire remaining portfolio without a vote.

Masked performance. A fund showing a rising DPI looks like it's performing. If that DPI increase came from a NAV loan distribution instead of an exit, the LP is looking at a use effect, not a value-creation effect. Multiple on invested capital (MOIC) and IRR calculations can get distorted the same way a subscription line distorts early-fund IRR, except this happens at the back end of a fund's life, when LPs are least likely to be scrutinizing the mechanics closely.

use on use. Most buyout portfolio companies already carry debt at the company level. A NAV loan adds a second layer of use on top, at the fund level, secured by the equity value of already-used businesses. If portfolio company values drop in a downturn, exactly when a GP is most tempted to draw on a NAV facility for liquidity, the LTV on that facility can spike fast, triggering a margin call or breach of covenant on assets the LP thought were unencumbered.

Fee-timing effects. Some fund documents calculate carried interest, the GP's performance-based cut of profits, off of distributed capital. A NAV loan distribution can accelerate carry payments to the GP off borrowed money, ahead of a genuine value-creation event. That's the kind of misaligned incentive Howard Marks and other credit-cycle veterans at firms like Oaktree have pointed to as the risk to watch across the entire fund finance category, not just NAV loans specifically.

None of this makes NAV loans illegitimate. It makes them a tool that needs a disclosure standard the industry is still building. Bain & Company's Global Private Equity Report has tracked this shift as part of a broader move toward fund-level financing as an asset class of its own, which tells you this isn't a fad. It's becoming permanent infrastructure. That makes the disclosure question more urgent, not less.

Due-Diligence Checklist for LPs

If you're an LP or an accredited investor evaluating a GP's fund, or already committed to one, here's what I'd ask before the next annual meeting. This isn't a recommendation to buy or avoid any specific security. It's a list of questions that separate GPs running a disciplined shop from ones hoping nobody asks.

• Does the LPA require advisory committee consent before drawing a NAV facility? If the answer is no, ask why the fund documents were never amended once NAV loans became standard market practice.
• What was the stated use of proceeds on the last draw? Follow-on investment and portfolio company support is a different risk profile than funding an LP distribution.
• What's the current LTV on the facility, and what's the covenant trigger? A facility sitting at 25% LTV with a 35% trigger has real room. One sitting at 28% with a 30% trigger does not.
• How is DPI reported relative to NAV-loan-funded distributions? Ask the GP to break out organic, exit-driven distributions from facility-funded distributions in the quarterly report. If they can't or won't, that's your answer.
• Is carried interest being calculated on borrowed-money distributions? If so, ask whether there's a clawback provision if the underlying assets don't realize the value the loan assumed.
• Who's the lender, and what's their remedy on default? A specialist NAV lender's default remedies can include control rights over the SPV holding your fund's portfolio interests. Know what happens in a stress scenario before you're in one.
• How does this fund's NAV facility usage compare to its stated fund life? A facility drawn in year 9 of a 10-year fund to "extend runway" raises a different question than one drawn in year 4 to bridge a follow-on round.

I'd also read the fund's most recent audited financials side by side with its investor letter. If the letter emphasizes DPI and the footnotes mention a NAV facility, do the arithmetic yourself before taking the headline number at face value.

The GP-led secondaries market runs on a related dynamic: funds extending life and generating liquidity through structural tools rather than straight exits. If you want the fuller picture of how continuation vehicles work and what LPs should demand there, AIN's guide to GP-led secondaries and continuation funds covers that ground. And if the distribution itself flows down a waterfall you don't fully understand, our explainer on distribution waterfalls and carried interest is the companion piece. Read it before your next capital call notice, not after.

NAV loans aren't going away. The Fund Finance Association's growth projections, the volume Rede Partners tracked among specialist lenders, and Haynes Boone's record 2025 numbers all point the same direction: this tool is becoming standard infrastructure across private equity, not an exception. That's fine. Debt secured by real portfolio value, used to bridge a bad exit market or fund a good follow-on, is a legitimate financing decision. What I want you watching is the gap between what the DPI number says and what actually happened. Ask the question every quarter. Make the GP answer it in writing.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.