How NAV Financing Is Used by Private Funds

Zac Barnett is a longtime Chicago lawyer who leads Fund Finance Partners, LLC (FFP), and delivers an array of pathways for private investment facilities and equity funds to coordinate subscription lines. Attorney Zac Barnett’s areas of expertise include net asset value (NAV) financing avenues for meeting objectives such as improved fund returns.

With NAV financing, a bank or alternative lender delivers a term or revolving credit facility to the fund (or one or more of its subsidiaries). The basis of this loan is the fund’s investment portfolio net asset value. These types of loans are typically made when the closed-end private fund has reached maturity, beyond the investment or commitment period, with substantially all available capital commitments called and deployed toward existing investments. NAV financing provides managers with extra flexibility in portfolio deployment, and thus is commonly supported by fund investors.

Whether the NAV financing is utilized to improve liquidity, protect principal, or capitalize on new opportunities, such vehicles are usually secured by collateral. The structure of collateral packages typically prioritize the NAV lender over other investors for repayments when it comes to fund distributions and liquidations. It also provides the NAV lender with the ability to foreclose on the fund’s asset portfolio and oversee its disposition, should a default occur. Technical aspects of such scenarios, such as loan-to-value, cashflow sweeps and repayments, and portfolio diversity need to be negotiated carefully with the NAV lending party.