Your sponsor can borrow against you without borrowing from you.

What is a NAV loan?

A facility advanced to a fund rather than to a company, secured on the fund's portfolio taken as a whole and repaid from the proceeds of exiting it. The borrower is the fund vehicle. The collateral is a diversified pool of equity positions. The company you run, if you are inside such a portfolio, is one of those positions and is not itself the borrower.

It sits at a different level of the structure from anything the operating company would recognize. A leveraged buyout puts debt on the company, tested by covenants on the company's own earnings. A NAV facility puts debt above the company, tested against the value of the portfolio, and the operating company is neither a party to it nor usually informed of it.

Managers use them for three purposes. To fund follow-on investments and add-ons without calling more capital from investors. To provide defensive capital to a portfolio company that needs it. And to make a distribution to investors ahead of realizations, which is the use that generates the argument. Most facilities completed in the last cycle were used to increase investment capacity for new or follow-on investments, with early signs of an uptick in transactions aimed specifically at boosting distributions (Rede Partners, NAV Financing Market Report 2026, published June 2026, its fourth annual survey of lenders).

How big is the market, and what can actually be counted?

Less than the headline numbers suggest, once you separate what is measured from what is estimated, and the distinction is worth setting out because almost nobody makes it.

What is counted: rated NAV loan issuance reached a record 23 billion dollars across 38 transactions in 2025, and cumulative rated issuance since 2018 exceeds 82 billion dollars across 157 transactions through the first half of 2026. Of 279 surveillance reviews of private equity and secondaries NAV loans between 2020 and the first half of 2026, 95 percent of rating actions were affirmations and 4 percent were upgrades, with two downgrades and four negative watch placements across 2025 and the first half of 2026. Private equity NAV loans are predominantly rated in the BBB-plus to A-minus area and secondaries NAV loans in the A category (KBRA, published 13 July 2026).

What is estimated: total market deployment. The most widely quoted figure, roughly 70 billion dollars deployed in 2025 on a path to 145 billion by 2030 against an addressable market of 700 billion, originates with a specialist lender and was first published in January 2025; it has been repeated in 2026 coverage but not independently measured. It should be read as a participant's estimate carrying an early-2025 origin, not as a current print.

What is verifiable at the supply side: a record 12.9 billion dollars of NAV lending fund closes in 2025, including the largest dedicated NAV fund raised to date at 5.5 billion (With Intelligence, Private Credit Outlook 2026, published June 2026). One manager closed inaugural NAV lending and preferred equity strategies at a combined 4.3 billion dollars in June 2026. Weighted average deal volume per lender rose 142 percent to over 800 million euros in 2024 from 330 million in 2023, with 60 percent of lenders reporting increased activity for funds below 500 million euros (Rede Partners). Roughly 80 percent of respondents to a full-year 2025 market survey expected volumes to rise again in 2026 (Proskauer, February 2026).

Pricing has compressed as that capital arrived. Facilities have been clearing in a range of roughly 400 to 700 basis points over the benchmark rate, tightening by about 40 basis points, with the newest survey reporting an emerging divergence: median deal sizes at bank lenders have tripled while alternative lenders' have stayed flat (Rede Partners). Compressing spreads in a product with a short performance history and no downturn behind it is the observation worth holding on to.

Why is it contested?

Three objections, and they are not equally strong. The first is that a NAV loan used to fund a distribution manufactures the appearance of realized returns without a realization. Distributions to fund investors have run near 10 percent a year against a historical average of 25 percent since 2001 (Jefferies Private Capital Advisory, published July 2026, as at 30 June 2026), and the metric that now governs whether a manager raises a successor fund is realized cash rather than carrying value. A borrowing that produces a cash distribution improves that metric without improving the portfolio, and the loan is repaid later out of exits that have not yet happened.

The second is that it adds leverage the fund's investors did not underwrite. An investor who agreed a portfolio at a stated level of company-level debt now holds the same portfolio with additional debt above it, senior to their equity, cross-collateralized across positions that were previously independent of each other. A concentrated problem in one holding becomes a portfolio-level problem, which is the opposite of what diversification was meant to do.

The third objection is about disclosure and it is the weakest, because it is being fixed. Fund investors now rank fund-level facilities alongside continuation vehicles among the alignment issues they track, with the growth of private wealth channels ranked ahead of both, and the updated guidance on continuation vehicles requires a manager to demonstrate that the vehicle is superior to alternatives that expressly include a fund-level financing facility (industry association survey reported by ION Analytics and Mergermarket, March 2026; industry association guidance reported by Mercer Capital, 17 July 2026). The facilities are being named in the documents that govern the choices.

The counter-argument deserves airing because the rating record supports it. On the rated slice, these loans have performed: 95 percent affirmations across 279 surveillance reviews, two downgrades in eighteen months, loan-to-value at origination that leaves substantial cushion, and structural features including delayed draw components, hybrid collateral packages, portfolio construction rights, soft maturity mechanisms and tranching (KBRA, 13 July 2026). The honest position is that the instrument has not yet been tested through a cycle in which portfolios cannot be sold at carrying value, which is precisely the environment the market is currently in.

What does it mean if your sponsor's fund is levered above you?

Four things, in descending order of how often they are discussed with management, which is to say the first is discussed and the rest are not.

It changes the exit calendar. A facility has a maturity, and repayment comes from portfolio realizations. A fund with a NAV loan maturing has a reason to sell something that is unrelated to whether any particular company is ready, and management of the most saleable asset in the portfolio should assume they are the candidate. That can accelerate a process management wanted or force one it did not.

It changes what a follow-on request looks like. Capital advanced under a NAV facility to support a portfolio company is not fresh equity from investors; it is borrowed money the fund must repay from the same portfolio. That does not make it worse money, but it does mean the sponsor's tolerance for a second request is lower than the size of the facility suggests, and it means the sponsor is paying a coupon on the support it is providing.

It changes the sponsor's behaviour on price. A manager repaying fund-level debt from exit proceeds has a floor below which an exit does not solve its problem, and that floor is set by the facility rather than by the asset. This is the mechanism by which an operating company that is performing gets held longer than its own fundamentals warrant, or sold faster.

And it changes what a distressed outcome looks like. Company-level debt puts the operating company's lender across the table in a downside. Fund-level debt adds a creditor whose claim is against the portfolio and who has no relationship with the business, no view on its operations, and no reason to prefer a going-concern outcome for it specifically. Management will never meet that creditor, and in a bad scenario that creditor's preferences will still be in the room.

What should an operator or co-investor ask?

Four questions, and the first one is the only one that is awkward to ask. Does the fund that owns this company carry a net asset value facility, and if so, what is its maturity? An owner or a rolling shareholder in a sponsor-backed business is entitled to understand the capital structure above their own position, and the maturity date is the single most useful fact in it.

Second, what is the facility's loan-to-value test and how is portfolio value determined for it? A test measured against the manager's own carrying values behaves differently from one measured against an independent valuation, particularly in a market where more than half of fund investors lose confidence in a manager once an exit prices more than 5 percent below the last mark (industry association webcast polls, April 2026, published in Bain, 8 June 2026). A manager with a value-based test and a reluctance to mark down is a manager with two reasons not to sell.

Third, what were the proceeds used for? Follow-on capital, defensive support and distributions are three different answers with three different implications for how much support the portfolio has left.

Fourth, for anyone rolling equity or co-investing alongside a sponsor: is the co-investment vehicle inside or outside the collateral package? That is a document question with a straightforward answer, and it determines whether a rolled stake is exposed to leverage secured on companies the roller has never seen.

None of these questions is hostile and none of them is unusual to ask in 2026. A sponsor that will not answer the first one has answered it.