Tax-Efficient Private Market Liquidity

For investors in private markets, the long-term capital appreciation of their holdings is a primary objective.

However, the illiquid nature of these assets can create challenges when short-term cash needs arise. The traditional route to liquidity – selling a portion of the portfolio on the secondary market – can trigger a significant tax liability in the form of Capital Gains Tax (CGT). This is where Net Asset Value (NAV) financing offers a compelling and tax-efficient alternative.

A NAV loan is, at its core, a loan secured against the value of your private asset portfolio. Crucially, because a loan is not a disposal of the underlying assets, it should not constitute a taxable event. This fundamental distinction has profound implications for investors seeking to manage their tax affairs intelligently while still accessing the liquidity they require.

Consider the scenario where an investor needs to raise £1 million. If they were to sell a portion of their private equity portfolio on the secondary market to raise these funds, they would likely realise a significant capital gain, particularly if the assets have appreciated substantially since they were acquired. This gain would be subject to CGT, with the rate depending on the investor’s individual circumstances. The tax payment would represent a direct and immediate erosion of their investment returns.

Now, consider the alternative: a NAV loan. The investor can borrow the £1 million against the value of their portfolio. They receive the cash they need, but because they have not sold any assets, no CGT is triggered. The investor retains full ownership of their portfolio, remaining exposed to all future upside potential. The loan is typically repaid over time from the distributions generated by the portfolio itself. While the loan will have an associated interest cost, this is often a more palatable and predictable outflow than an immediate and substantial tax bill.

This tax efficiency is a key strategic advantage of NAV financing. It allows investors to separate their liquidity needs from their investment and tax planning decisions. They are not forced into a premature sale of assets simply to raise cash. Instead, they can time their exits to maximise value and optimise their tax position, all while having the flexibility to access capital when they need it.

In summary, NAV financing provides a sophisticated mechanism to unlock liquidity from a private portfolio without creating a taxable event. It allows investors to defer capital gains, retain their investment exposure, and manage their financial affairs in a more strategic and tax-efficient manner. For any long-term investor in private markets, it is a powerful tool that merits serious consideration.