NAV loans: the leverage no one sees

When a fund can no longer sell, one option remains: borrow against what it is not selling. That is the principle of the NAV loan, the loan secured on the net asset value of an entire private equity or private credit portfolio. The tool had existed for years in the discretion of “fund finance” desks. The exit drought made it change scale: about $70 billion deployed in 2025 according to 17Capital, a market that a consensus of projections sees tripling or more by 2030. This leverage stacks on top of the already heavy debt of the portfolio companies, and it remains largely invisible to the end investor. This article takes apart the mechanics, the use that causes offence, and what this market says about the real state of private assets.

The drought that creates the need

The NAV loan thrives on a simple problem: the money no longer comes out. According to Allianz’s analysis, annual distributions from private equity funds have been stuck between 8 and 10% of portfolio value for three years, against a historical norm of 20%, ever since the rise in rates froze the exit channel. The stock piles up: about 28,000 companies held by funds are awaiting a buyer worldwide, against 19,000 in 2019, some $3.2 trillion of unrealised value.

This breakdown in distributions has changed the hierarchy of metrics. DPI, the capital actually returned relative to the capital paid in, has dethroned the internal rate of return as institutional investors’ first criterion: according to the surveys cited by Pipeline Road, 74% of LPs now make it their primary re-up criterion. A manager who wants to raise the next fund must therefore show cash returned, precisely when sales no longer generate it. The NAV loan was born big in this vice.

Borrowing against the whole portfolio

The mechanics are best understood by contrast with the funds’ other credit line. Early in its life, a fund uses a subscription line: a bridge facility secured by its investors’ uncalled commitments, repaid as capital calls come in. The NAV loan comes at the other end of the fund’s life, when the capital is deployed and there is nothing left to call. The collateral is no longer the LPs’ promise, but the value of the portfolio itself: per the reference description by Moonfare, a diversified pool of holdings, structured as share pledges or assignments of distribution rights, with a loan-to-value typically capped between 5 and 25% of net asset value.

This low loan-to-value and the cross-collateralisation over every line of the portfolio are what make the lender safe: the whole set of holdings would have to lose enormous value before the loan is threatened. They also explain why agencies agree to rate these facilities, an exercise whose limits our guide on reading a credit rating recalls when the pledged value is itself a model-based estimate. Because everything rests there: the “V” in NAV is a net asset value computed by the manager, not a market price. One borrows against an opinion.

The use that causes offence: the borrowed distribution

What the proceeds are used for makes all the difference, and this is where the controversy formed. Used to support a portfolio company or seize a bolt-on acquisition, the NAV loan is a management tool. Used to pay a distribution to investors, it becomes something else: the fund borrows to hand LPs money the portfolio has not yet earned, and the distribution inflates DPI without any value having been realised. The investor receives, in effect, an advance on their own supposed performance, whose cost and risk stay in the fund.

The criticism drew blood. According to the history compiled by Wikipedia, the use of NAV loans to fund distributions fell 90% in the second half of 2023, under investor pressure. The Fund Finance Association now estimates that about 80% of facilities serve to reinvest in the portfolio and 20% to distribute. The proportion has cleaned up; the precedent remains: when DPI pressure returns, the borrowed-distribution tool is available, documented, and road-tested.

Leverage on leverage

The systemic point is not any single use, but the stacking. The companies in a private equity portfolio already carry their acquisition debt, that of the LBOs and direct loans whose defaults and liability management we track. The NAV loan adds a layer of debt at the fund level, pledged on the net value of those same indebted companies. And upstream, the fund’s investors, insurers first, sometimes carry their own leverage. Moody’s explicitly files NAV loans, along with PIK, under the hidden leverage proliferating in US leveraged finance, outside the balance sheets where one looks for it. The Financial Stability Board goes further: its May 2026 report finds that private credit’s reported leverage is understated and that true leverage, all layers included, would approach 7 times EBITDA.

The stack’s fragility lies in its circularity. The NAV loan is pledged on a value the manager computes itself, that terrain of model-based valuations we have documented: as long as you do not sell, the NAV stays smooth. Yet it is precisely because one does not want to sell that one borrows. Should valuations be marked down, the loan-to-value would rise mechanically, triggering margin calls or early repayments, at the worst moment. Fund-level leverage thus turns a valuation correction, an accounting event, into a liquidity need, a very real one.

The ILPA framework, a late guardrail

Institutional investors have obtained the beginnings of a framework. The guidance published by ILPA, the LP association, recommends that managers obtain the prior consent of the investor committee before putting a NAV facility in place, and provide all LPs with standardised disclosures: use of proceeds, size, structure and vehicles used, costs, induced obligations. As Mayer Brown notes, this guidance prohibits nothing: it demands transparency.

That it had to be demanded is the information. Until this guidance, a fund could add a layer of debt on its investors’ portfolio without informing them by name. The market, meanwhile, is institutionalising at speed: the Fund Finance Association sizes the market around $100 billion and projects $600 billion in 2030, while 17Capital and Oaktree retain a path from $44 billion in 2023 to $145 billion in 2030. The ranges diverge, the direction does not.

A legitimate tool, on three conditions

Fairness requires giving the defence its full strength, because it is solid. First, a well-used NAV loan is often the least bad option: rather than dumping an asset into a closed exit market, the fund borrows at a modest loan-to-value to hold out for better conditions, or to defend a portfolio company that needs capital. The forced sale would destroy more value than the loan costs. Second, the lender’s risk is genuinely contained: a 5 to 25% loan-to-value on a diversified, cross-collateralised pool requires a generalised collapse to be dented, which justifies these facilities finding sophisticated lenders and ratings. Finally, the rebalancing of uses, 80% toward investment, shows that LP discipline has bitten: ILPA did not ban the tool, it brought it out of the shadows, and that is largely enough when investors do their job.

The defence holds on three conditions: that the pledged NAV be honest, that the use remain investment rather than cosmetic distribution, and that LPs know what is done in their name. None of the three is guaranteed by construction. All three rest on the quality of governance, in a market where the value is declared by the one borrowing against it.

The dials to watch

Five dials will say whether fund-level leverage stays a tool or becomes a symptom. The share of facilities funding distributions, whose rise would signal the return of borrowed DPI. The level of loan-to-values granted, because a market drifting from 15 toward 30% of NAV changes nature. The gap between model-based valuations and actual secondary-market transactions, which tests the honesty of the “V”. The recovery, or not, of real distributions in 2026, which Allianz sees climbing back toward 17 to 19% in its central scenario: if it materialises, the need deflates by itself. And the application of the ILPA guidance, measurable by the number of funds informing their LPs before rather than after.

The NAV loan is the chemical developer of private markets: it exists at this scale only because exits are jammed and valuations refuse to fall. A market that borrows against its own estimates to wait it out is making a coherent bet as long as the wait ends in sales. If it does not, the added leverage will not have bought time: it will have added a floor to what must, one day, be reconciled with prices.

Sources

• Allianz Research, “Private equity in transition: from distribution drought to selective recovery” (distributions at 8-10% of NAV against a 20% historical norm, 17-19% projection for 2026, NAV lending path from $44bn in 2023 to $145bn in 2030 per 17Capital/Oaktree): https://www.allianz.com/en/economic_research/insights/publications/specials_fmo/260220-private-equity.html
• Partners Capital / Private Markets Insights (~28,000 portfolio companies awaiting exit against 19,000 in 2019, ~$3.2tn of unrealised value): https://www.privatemarketsinsights.com/post/the-liquidity-drought-forces-a-reset-private-markets-midyear-review
• Pipeline Road, “Private Equity Returns Statistics” (DPI the primary re-up criterion for 74% of LPs): https://pipelineroad.com/blog/private-equity-returns-statistics
• Moonfare, “What is NAV lending” (typical loan-to-value of 5 to 25% of NAV, cross-pledged collateral, distinction from the subscription line, ~$70bn deployed in 2025, $700bn TAM): https://www.moonfare.com/blog/what-is-nav-lending
• Wikipedia, “NAV lending” (90% fall in distribution-funding use in H2 2023, ~80% of facilities oriented to investment per the Fund Finance Association): https://en.wikipedia.org/wiki/NAV_lending
• Private Debt Investor, “NAV loans are the next frontier of private credit’s growth” (market ~$100bn, $600bn projection for 2030 per the Fund Finance Association): https://www.privatedebtinvestor.com/nav-loans-are-the-next-frontier-of-private-credits-growth/
• Moody’s, “Will CLO performance and leveraged finance trends diverge or align in 2026?” (hidden leverage via PIK and NAV lending increasingly prevalent): https://www.moodys.com/web/en/us/creditview/blog/leveraged-finance-and-clo-2026.html
• Financial Stability Board, “Report on Vulnerabilities in Private Credit”, 6 May 2026 (reported leverage understated, true leverage close to 7x EBITDA): https://www.fsb.org/uploads/P060526.pdf
• ILPA, “New ILPA Guidance Encourages LP-GP Dialogue, Transparency around NAV-based Facilities” (LP committee consent, standardised disclosures): https://ilpa.org/news/new-ilpa-guidance-encourages-lp-gp-dialogue-transparency-around-nav-based-facilities/
• Mayer Brown, “NAV Facilities: The ILPA’s New Guidance” (scope and limits of the guidance): https://www.mayerbrown.com/en/insights/publications/2024/09/nav-facilities-the-institutional-limited-partners-associations-new-guidance

This article is journalistic analysis and does not constitute investment advice. Market sizes are estimates, cited as of the date of their sources.