MODELING LP RETURNS WITH AND WITHOUT A NAV LOAN

In this article, the Nodem team outlines the terms, mathematics, and logic behind fund-level NAV facilities. Here applied to a Growth fund looking to use the facility for follow-on investments. The model is illustrative to simplify the key mechanics. Holding periods are fixed, and performance fees have been excluded.

NAV loans function as subordinated debt[1] secured by a private markets fund or a specific portfolio subset. Unlike traditional direct-to-company financing, the fund itself serves as the primary borrower.

While buyout funds have long utilised dividend recapitalisations to return capital, a NAV loan for distribution follows the same "re-levering" logic. The primary distinction lies in applying leverage at the fund level rather than the asset level.

• Three common use cases for NAV loans:

  • Accretive Investments: GP can buy more of a standout portfolio winner. NAV loans are a non-dilutive[2] capital that can be used to double down on winners.

  • Portfolio company distress: a GP needs fast rescue capital for a portfolio company or risks the loss of a significant portion of the portfolio's value.

  • Fund-level “dividend recap”: Take out a loan to fund LP distributions rather than doing so at the underlying portfolio level.

[1] To avoid confusing a potential borrower, rephrase this to: "NAV loans are structurally subordinated to asset-level debt but sit senior to LP equity at the fund level.

[2] NAV loans provide non-dilutive capital that is accretive when the underlying asset's growth exceeds the cost of the facility.

A Growth GP decides to use a NAV facility for an accretive investment

• For simplicity, let’s assume a Growth GP has a portfolio of 5 companies. The GP invested $25m in each company during the fund's first 5 years.  

• The GP is now seeking a $50m NAV Loan to double down on Company 1 at the end of year 5.

• All companies in the portfolio have performed well, generating a 18% IRR. Company 1 is performing exceptionally well at a 30% IRR. The GP expects this strong growth to continue until a sale. A solid, accretive use case for a NAV loan.

• Each company in the portfolio has a 5-year holding period except for Company 1, which is sold in year 10.

Why is the Growth GP considering a NAV facility?

In the NAV Loan scenario, an additional $50m is invested in Company 1 in Year 5. In the scenario without a NAV Loan, there is no investment. All growth rates, holding periods, entries and exits, and MOICs are the same.

The models below run through the math, but let’s begin with the Growth GP’s estimate of the difference between using a NAV facility and not using one. The mathematical proof follows this section.

The GP calculates that the IRR and MOICs are likely to increase with a NAV loan in exchange for delayed distributions.