Fund finance and NAV lending

What fund finance is

Fund finance means lending to investment funds rather than to operating companies. The two main types are subscription lines, secured on investors' (LPs') uncalled commitments early in a fund's life, and NAV loans, secured on the value of the investments a fund already owns, usually later in its life.

A NAV loan is repaid from exits: sales, IPOs and refinancings of the portfolio companies. Loan-to-value is usually low (10–25% of net asset value), but the collateral is a set of equity stakes that sit beneath each company's own debt, are valued by the borrower, and can take years to sell.

Key metrics

Typical risks

• Valuation: GP marks can lag public markets; compare them with listed peers and recent deals.
• Liquidity and timing: exits slow down in weak markets, exactly when the loan needs them.
• Structural subordination: each company's own lenders are paid first; the fund owns only the equity.
• Concentration: a few large positions drive most of the value.
• PIK and loan growth: paying interest in kind lets the loan grow while the collateral shrinks.
• Use of proceeds and alignment: money used to pay investors early, or to prop up a weak company, adds risk without adding collateral.

Scenarios to model

Run at least one case where marks fall toward public comparables and exits stop for a year or two while interest is paid in kind. Track LTV quarter by quarter against the sweep and default levels.

Then run a concentration case: the largest position is cut sharply and the rest modestly. Finish with recovery: what a forced sale of stakes in the secondary market would raise, and how long it would take.

Protections to look for

• LTV covenant with cash sweeps that step up as LTV rises.
• Concentration limits on eligible NAV.
• Independent valuations, or marks tied to public comparables, at least yearly.
• Limits on distributions to investors while the loan is outstanding.
• Short or capped PIK, and a minimum liquidity test.
• Controls on follow-on investments into struggling companies.

Questions an IC will ask

• How do the GP's marks compare with public peers, and what's LTV if we mark to market?
• Where will the cash to repay us come from, and when?
• Why does the fund need this loan now, and who benefits from the use of proceeds?
• How fast does LTV rise if marks fall and interest is PIKed?
• What would we recover selling stakes in a weak secondary market?

Common memo mistakes

• Treating low LTV as low risk without testing the marks or the liquidity.
• Underwriting the fund like a single operating company with EBITDA leverage.
• Forgetting that each company's own debt ranks ahead of the fund's equity.
• Ignoring PIK when running the downside.
• Not taking a view on a distribution to investors funded by the loan.