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A stagnant M&A market, valuation mismatch, and longer holding periods for private equity GPs — the perfect recipe for a direct lending drought.
But one man's misfortune is another man's gain, as these are the exact factors creating an appetising environment for NAV lenders.
“The state of the M&A market is a tailwind for NAV, just as Trump’s tariffs and Liberation Day is a tailwind,” Peter Hutton, head of NAV financing at Arcmont said. “Increased market uncertainty means that sponsors are choosing to delay exiting their assets, which creates more opportunities for NAV lending.”
This unfavourable exit environment, combined with a very competitive fundraising market, have contributed to a shift in GPs’ use of NAV financing.
“We are seeing an increased interest for NAV loans for fully invested, or nearly-fully invested funds,” Fokke Lucas, partner at 17Capital said.
Up until recently, funds would normally deploy about 70% to 80% of their capital and use the remainder to support portfolio companies. Now, funds are more frequently deploying 90% to 95% of their funds, turning to NAV loans for any add-on opportunities, sources said.
“Instead of reserving 30% of the capital for buy and build, then doing the next platform deal from the next vintage fund, GPs are doing the next platform deal from the current fund, to maximise the capital deployed of the fund” Lucas said.
Arcmont’s Hutton added: “One of the ancillary benefits the sponsors are seeing is if you put a NAV facility in place, you don’t need to hold back 20% of your fund — you can draw right up to 95% — and LPs prefer to have more of their capital drawn.”
He continued: “Then, if there are any rainy day requirements or if there’s another M&A opportunity, you have a NAV lender in the background and you can just tap that NAV facility again if you need it.”
Simultaneously, the longer holding periods for PE funds equals more capital needed for value creation, as LPs will expect the GP to generate a similar IRR for a longer period of time.
“There are a number of funds who are fully deployed and still need liquidity to support their investments, because market conditions may mean it's not the best time to be disposing of those right now,” Ed Saunders, partner at Goodwin, said. “For lenders, it means there are a number of funds out there with strong and diverse portfolios. That's an attractive proposition for a NAV lender.”
NAV it your way
Direct lenders are currently sitting on heaps of capital, ready to service their portfolio companies, so why opt for a NAV loan?
“Firstly, size. If you want to fund additional M&A, your three main options are senior debt — which is limited by covenants or the company’s ability to service that debt —, junior debt — which is limited by LTV considerations and a typically a more expensive cost of capital —, or equity — which is expensive and in short supply,” Arcmont’s Hutton said.
“Let’s say you have a single company at 5x net leverage with a net leverage covenant at 6x. The amount of additional senior debt you can raise is pretty limited, but if you have a portfolio of 10 companies, even a conservatively levered 10-15% LTV NAV loan at the fund level can generate multiple amounts more firepower for additional value creation.”
In the cases where a GP needs debt for more than just a single add-on, efficiency might be a driver for NAV. If going down the route of debt at the asset level, the GP would have to run several processes.
“There’s the point of ease of execution and certainty of funds. In a case where you have three add-on opportunities, they will never be all on the same day,” 17Capital’s Lucas said. “So if you structure a NAV loan, two of the opportunities may be funded on day one, and then you have additional capital you can use for the third later on.”
Goodwin’s Saunders added: “Fund managers can obtain debt on relatively favourable terms secured against the whole portfolio, but with optionality as to how to deploy the proceeds of that debt.”
“You can take the strength of the portfolio as a whole and deploy that into specific areas where there is opportunity to enhance value.”
Because of this, an individual default in the portfolio is unlikely to affect the NAV loan, as it is just one company of many, a source said, meaning risk is spread across many different companies.
Lastly, there is the point of making distributions to the fund investors ahead of NAV loan repayment, as early distributions can be very valuable for private equity LPs, Lucas pointed out.
“Because NAV lenders benefit from a diversified portfolio, as long as the loans are performing, we are happy to allow the manager to send cash back to its investors out of exits, dividend recapitalisations, or whatever proceeds might be generate from the portfolio ahead of the repayment of the NAV loan” Lucas said.
NAVigating risk
With the increased interest in NAV, there is also increased concern around what it does to the risk of a fund.
Some 9fin sources expressed concerns particularly around the compounded effect of lending against a pool of private assets, in which each could be susceptible to overvaluations or delayed markdowns.
“It's leverage on leverage, it's risk on risk – it's not good. You shouldn't have to take out a NAV loan to support your portfolio,” one PE firm source said, arguing NAV can serve as a warning sign that a portfolio is not in good shape.
“The only way I could see NAV being the best option for [your] investors is if you have a large portfolio company that is in bad shape,” they said.
The source also saw a use case if NAV financing is used by funds to keep their heads above water. “But to be honest, if you are forced to take out a NAV loan then you're probably toast anyway,” they added.
Despite a bit of scepticism among some market participants, if we are to believe the statistics, NAV loans are reasonably safe. All of the sources 9fin spoke to said they had never seen a default in a NAV loan.
“There is of course some added leverage when taking out a NAV loan, so in that sense then sure, there’s some added risk,” one NAV lender said. “However, we usually come in later on in the fund’s life, so the portfolio is already in place. That means we can see the quality of the assets and analyse the fund performance.
NAV loan-to-value ratios typically and range anywhere form 10% to 30%, according to a number of market sources, including Pemberton Asset Management.
“NAV loans have very low LTV, so while you do add some leverage, the amount is limited,” a legal source said.
“Such low LTVs means default risks are manageable, and questions of risk within the wider market are “more of a perception thing.”
“A NAV loan rarely defaults when it is properly structured including a sensible covenant headroom and well thought out cure periods,” Gianluca Lorenzon, head of fund finance advisory at London-based market risk firm Validus Risk Management, told 9fin.
As the market matures, defaults on NAV loans might start to trickle through, one NAV lender admitted, as more players enter the market and smaller funds begin to be lent to. “It will be a lot of trial and error as the asset class grows,” they added.
Other market participants said they do not expect to see an uptick in defaults at all.
Here to stay?
NAV financing has been around for a while now, but it is still an ‘up and coming’ product. It might be experiencing a number of headwinds in the current market environment, but what will happen once the M&A deal flow unlocks?
“On the one hand, private equity, due to the high-interest rate environment and relative instability within the stock market, is unable to monetise some of [its] loans. So, in order to continue holding these assets — and as companies are underperforming in their portfolios — they are assessing NAV-based lending,” said Patrick Marshall, head of private credit at Federated Hermes.
“But if the IPO markets reopen and you get strong valuations for assets, you’ve got a situation where interest rates come down and the performance of individual assets improves,” he added. “There is an argument to say that demand for these [NAV lending] products will reduce, and therefore, that growth won’t continue.”
Goodwin’s Saunders said they have had questions around what might happen to the growth of NAV financing once the M&A market unlocks. However, he thinks the growth opportunities will persist.
“There are many managers out there who are now looking at NAV as a serious liquidity tool in the ordinary course.” he said. “NAV financing is not just about a locked up M&A market, their treasury functions mean there are other good use cases for them, so we think there remains a lot of untapped potential.”
Arcmont’s Hutton agreed: “NAV is here to stay. In our view, adoption of NAV will grow from approximately 35% today in Europe, towards 100%. Obviously, how long that will take is TBD.”
“Our research shows that the average increase to net fund IRR for a sponsor to do a NAV facility — 80% for M&A and 20% distributions — is between 100bps and 175bps. So effectively, it is one of those pieces of technology where the cost of not having one and missing out on the potential increase in value creation will become greater and greater.”
Seemingly, the rest of the market agrees. According to Partners Group, the global market for NAV financing is expected to hit over $600bn in 2030, compared to $100bn in 2022. Pemberton is even more optimistic, expecting NAV to be a $700bn market by 2030.
More conservative numbers from Oaktree Capital Management saw the market valued at $44bn in 2023 and forecasted to reach $145bn by 2030, as cited by a Nomura report last month.
As a result, asset managers are increasingly looking for their own slice of the NAV lending pie.
None more so than Oaktree-owned 17Capital, which was founded in 2008 as a private credit manager specialising in NAV finance and is among the largest players in the market. 17Capital raised $5.5bn for its latest NAV lending fund, according to a press statement.
Across 2024, 17Capital reported deploying more than $2bn across 14 investments in 2024. Since its inception in 2008, 17Capital has raised around $15bn in total funds as of March 2025 alongside six vintage funds since 2010, according to its website.
Elsewhere, Pemberton last July announced a first close of over $1bn in investible capital backed by the Abu Dhabi Investment Authority. Meanwhile, HSBC Asset Management launched a $1bn fund in September 2024, while Hark Capital launched a $645m fund in July 2024, according to With Intelligence research.
The opportunities in NAV are clear — the ability to increase the size of the pie and go after additional value creation opportunities like M&A, CapEx, rollouts, expansions and so on.
Hutton said: “Being able to fund that through non-dilutive equity at a debt cost of capital… It’s pretty special.”
