2025 NAV Facilities Outlook: Evolving Applications and Best Practice Considerations

Now valued at $100 billion globally, the NAV finance market has grown significantly. NAV financing offers non-dilutive capital secured on the net asset value of a fund and can be readily implemented alongside equity commitments and other fund finance debt arrangements, like capital call facilities. As more funds enter later life phases, NAV facilities have proven useful for bridging asset disposals, offering investor liquidity and for working capital enhancement purposes, as well as providing more traditional asset leverage.

As economic conditions improve, we expect funds pursuing a large range of strategies to continue employing NAV loans across the fund lifecycle for a number of evolving use cases. Alongside any leverage expansion, funds will need to understand, monitor and manage the risks. In what follows, we outline some key best practices for NAV financing in 2025.

NAV Financing Best Practices

To promote success and minimize risks, funds looking at taking advantage of NAV financing in 2025 should consider the following:

The industry big picture - investors and ILPA

In 2024, the Institutional Limited Partners Association (ILPA) introduced a five-part NAV based facilities guidance framework for LPs and GPs. Key aspects of the recommendations that funds looking to use these financing tools need to understand include:

• Provisions likely to be incorporated in LPAs to "encapsulate NAV based facilities" and "ensure a shared set of expectations and guardrails" around this type of funding; and 
• Specific LP engagement in particular use cases. There is additional sensitivity in circumstances where a NAV facility may be used for generating an LP distribution (this is not prohibited, but facilities being used in this way will be subject to extra up-front considerations and LPAC consultation before they are put in place).

Governance and fund documents - leverage limitations

NAV loans are especially useful for funds looking to manage liquidity, as they can be used in circumstances where there is already other debt, at the fund and/or asset level, in the structure. 
However, to avoid over-leveraging the fund, borrowers pursuing such financing need to carefully evaluate borrowing and leverage limitations in the governing documents. These limitations can be complex, in particular where they are divided up into buckets allocated to different financing products and/or use cases. For some funds, regulatory leverage limitations may also come into play, and so sponsors need to be keenly aware of the regulatory environment in which they operate when considering new facilities to support the fund.

Some LP agreements also contain explicit extra limits and/or consent rights for NAV loans, making it necessary to get prior investor or LPAC consent and/or secure amendments before turning to NAV financing. These types of additional requirements can significantly increase implementation costs and timelines, so up front assessment and planning are essential.

Maturity and markets

Funds might have investment and post-investment period term extensions built into their governing documents; they may not be intending to repay NAV financing at maturity, but to extend or refinance to cover an elongated fund term.

Whilst a falling interest rate environment might mean less cause for concern on refinancing pricing, non-traditional lenders have made NAV finance funding readily available in recent years as higher pricing enable entities, including other funds with their own alternative capital funding arrangements, to get into the market. Capital availability may therefore become more constrained if pricing drops below relevant thresholds, so funds will need to keep a close eye on markets and maturity plans.

NAV financing deal terms

When implementing NAV financing, funds should keep an eye out for these potential challenges when putting deal terms in place.

• Handling eligible and ineligible assets: Depending on the anticipated portfolio dynamics, sponsors may want to consider whether they need the option to separate out assets that are not subject to the NAV loan eligibility criteria (and potentially also subject to security carveouts), which can be more important when this financing comes earlier in the fund's lifecycle.

Part-portfolio NAV loans are also an option when some of the existing fund assets are segregated for purposes of a financing, leaving others in an unleavened and unsecured pool. While lenders might impose restrictions on how large an "ineligible" pool can be relative to covered assets, having this option can prevent control issues where the constraints of the NAV facility might otherwise exert too much influence over the fund’s strategic direction.

• Valuation sensitivities: With NAV loans, borrowers will be obligated to secure valuations for the underlying assets in the fund on terms and subject to a process that is satisfactory to the lender (or otherwise could see the lender do it at the borrower's expense as a fallback).

In a down market, it can be difficult to manage valuation requirements and there may be more scope for delays in obtaining valuations, disputes over the process and / or substance, and potentially scenarios where lenders opt to formally challenge valuations and obtain comparison valuations from other sources (which may be at the borrower's cost). Managing lender appetite to take advantage of these types of protection—for example, by limiting the number of revaluations that can be carried out outside an event of default scenario; limiting the type of circumstances in which borrowers will pay; having an agreed list of valuers that the lender can select from; and potentially requiring lenders to pay where they trigger the process but no material deviation in value is ultimately uncovered—will all help borrowers to manage NAV facilities through valuation difficulties and avoid waiver requirements and/or defaults arising.

It can also be difficult to accurately assess assets early in the fund lifecycle based only on pipeline expectations, so valuation grace periods—where cost-basis only valuations are initially used—might be required to bridge early-fund-life valuation timeframes.

• Avoiding cliff edges: When structuring the financial covenants, try to avoid having a “cliff edge” for default. Instead, create lead-in steps at 5% or similar intervals on lead up to the breach ratio and implement pre-default steps to address issues, such as distribution locks at 35%, should the portfolio precipitously decline in value.

• Facility sizing flexibility and proportionality: On the flip side, when the fund value is increasing while the size of the loan remains static, borrowers might want to think about features that can keep the loan to value (LTV) proportional and potentially offer sizing flexibility (like accordions, additional tranches, etc.). They might look for benefits like fees discounts as the facility term progresses when the credit position is improving.

Funds will always want to be aware of avoiding hair triggers in financing arrangements that could result in unexpected enforcement over whole asset portfolios – particularly harmful and costly for a borrower in circumstances where excess collateral has built up in the security package over time given portfolio growth. Sponsors need to have an eye on proportionality at all times when a portfolio backed NAV facility is in place.

• Pricing points: Ultimately, NAV loans have execution costs, fees (including prepayment fees where applicable), and potentially higher margin price tags attached, so borrowers should carefully consider the comparative cost of this type of financing versus other more traditional bank lending that might be available to them. While there are certainly cases where NAV financing offers specific advantages, it’s important to keep an eye on costs versus benefits.

Navigating NAV

NAV loans offer fund borrowers a flexible financing solution that can be uniquely crafted to support a fund at any stage in the lifecycle.

While they can help foster growth, like any financial solution they need to be implemented carefully and strategically. They come with some specific risks that mean it is vital for sponsors to keep best practices top of mind in seeking to exploit all the advantages of this financing tool.

Authored by Bryony Widdup.