Divorce and Private Equity Fund Interests: How a NAV Loan Pays the Settlement Without Selling

Divorce is a liquidity event nobody plans for. For a family office or a senior investor whose wealth sits in limited partnership interests, it arrives with three cash demands at once: the settlement, the legal fees, and the unfunded commitments on funds that keep calling capital regardless of what a court is doing. The instinct is to sell. The alternative we see more often now is to borrow against the portfolio, keep it, and let the funds run their course.

This page summarises how that works. The full legal treatment, with statute references for US practitioners, is in our JD Supra article Divorce, Illiquid Portfolios and the NAV Loan.

Why can’t the fund interests simply be split between the spouses?

Because a divorce decree cannot make a former spouse a limited partner. Under the Delaware statute that governs most US private funds, an assignee of a partnership interest receives the economic rights but does not become a partner unless the partnership agreement allows it or all partners consent (6 Del. C. §17-702, §17-704). Nearly every LPA requires GP consent to a transfer. Splitting a 40 or 50 fund book in kind therefore means asking every general partner for sign-off, which takes months and does not always succeed. And the commitment follows the interest: a spouse who receives half the fund interests also receives half the future capital calls.

Can I borrow against my fund interests to pay a divorce settlement?

Yes. A NAV loan is a facility secured against the net asset value of a portfolio of private fund interests rather than against any single asset. The borrower keeps every position, no GP is asked to admit a new partner, and nothing is sold at a discount. Delaware law confirms that pledging a partnership interest does not cause the pledgor to stop being a partner (6 Del. C. §17-702(a)(4)), and the Uniform Commercial Code lets a lender take security over a fund interest even where the LPA restricts assignment, although the lender cannot enforce against the fund itself without GP consent. In plain terms, the law lets you pledge the interest; the LPA decides what the lender can do with it.

Loan proceeds are not income, so borrowing raises cash without a disposal and without crystallising gain. Transfers of fund interests between spouses incident to divorce are themselves tax-free under 26 U.S.C. §1041, but the spouse who keeps the interests keeps the original basis, built-in gain included. Good matrimonial counsel prices that asymmetry into the settlement.

What does a divorce NAV facility look like in practice?

A worked example from the full article. A hedge fund portfolio manager holds a $100m private portfolio across 50 funds with $40m of unfunded commitments. The settlement allocates the fund interests to him and requires an equalisation payment of $18m within 90 days of the decree, plus about $1m of legal fees. His remaining commitments of $24m will be called over roughly three years.

The facility: $25m in two tranches. $19m at closing for the settlement and fees, and up to $6m drawn over the following two years against capital calls. On a $100m book that is 25% loan-to-value, within the 25% to 35% ceiling most lenders apply to a diversified portfolio. Pricing for a facility of this kind runs at roughly 500 to 750 basis points over the reference rate, so 10% to 12% all in, with a 1% to 2% arrangement fee. Interest can be paid in cash or capitalised. If it capitalises, $25m at 11% becomes about $30.8m after two years and $34.2m after three. That is the price of not selling at the bottom to meet a deadline set by a court.

Nodem facilities are secured on the pledged interests and the distribution account. We do not take a personal guarantee as standard. Banks typically do.

What happens to capital calls during a divorce?

They keep coming. Funds do not pause calls because a court is involved, and a missed call exposes the investor to default interest, suspended distributions, forced sale or forfeiture under the LPA. A divorce facility is therefore sized to the total cash need, settlement plus calls, and tranched to the capital call schedule. The second tranche in the example above exists purely to meet calls as they arrive, so the borrower never has to choose between the settlement date and a GP’s funding notice.

How is the timing managed against the decree?

The settlement wants cash within 90 days of the decree. The lender wants the interests in the borrower’s sole name before it funds. Both can be true. A lender can issue a term sheet on the draft settlement agreement, run diligence on the portfolio in parallel with the court process, and sign a facility agreement whose only outstanding condition is entry of the decree and transfer of the interests. That signed commitment is useful at the negotiating table, because it lets the borrower agree a payment date with confidence rather than asking the other side for a deferral they will price.

Where interests are held personally across a large book, each GP receives a notice of the pledge and an instruction to pay distributions to a controlled account. Expect six to twelve weeks across 40 or 50 lines, with a handful of funds declining and falling out of the collateral pool. A borrower who starts the information pack while the settlement is still being negotiated is usually the one who closes on time.

Is the interest on a divorce NAV loan tax deductible?

It depends on what the money is spent on, not what secures it. US tracing rules (Treas. Reg. §1.163-8T) follow each dollar of proceeds to its use. Proceeds used to pay a former spouse or the divorce legal fees are a personal expenditure, and the interest is not deductible. Proceeds used to fund capital calls into investment partnerships are investment interest, deductible against net investment income with any excess carried forward (26 U.S.C. §163(d)).

Because one facility is often drawn for both purposes, keep the draws separate: two tranches into two accounts, with the capital call notice or settlement instruction matched to each payment. A borrower who commingles will find the IRS doing the allocation for them. UK borrowers should assume no relief for an individual and take advice.

What does Nodem need to see?

The same pack as any NAV facility, with two additions. The draft or final settlement agreement, because the interests must end up in the borrower’s name and free of the other spouse’s claim before funding. And the capital call schedule alongside the settlement payment dates, so the facility can be sized and tranched correctly.

Everything else is standard: the schedule of interests, the last four quarterly statements from each fund, the LPAs for their transfer and pledge language, and a view on whether a holding company exists or should. From a complete pack, an indication of appetite takes days and a term sheet about two weeks.

Nodem Capital is an FCA-authorised NAV lender providing facilities of $10 million to $100 million and above to family offices, wealthy individuals and private funds. To discuss a portfolio in confidence, contact Alex Branton at abranton@nodem.com or see our NAV loan parameters.

This page is for information only. It is not legal, tax or investment advice. The worked example and pricing ranges are illustrative, not an offer. Divorce, partnership and tax law vary by jurisdiction and change over time. Take advice from counsel admitted in the relevant jurisdiction before acting.

Frequently asked questions

Can a divorce court transfer my private equity fund interests to my spouse?

A court can allocate the economic value of the interests, but it cannot make your former spouse a limited partner. Under Delaware law an assignee receives economic rights only, and admission as a partner requires GP consent under almost every LPA. That is why most settlements allocate the interests to one spouse and an equalising cash payment to the other.

How much can I borrow against a private fund portfolio in a divorce?

Most lenders cap loan-to-value at 25% to 35% of their accepted value of a diversified portfolio of fund interests, after their own haircuts to reported NAV. On a $100m book that is roughly $25m to $35m. Nodem writes facilities of $10m to $100m and above.

How quickly can a divorce NAV loan be arranged?

From a complete information pack, an indication of appetite takes days and a term sheet about two weeks. Funding depends on the GP notice process, typically six to twelve weeks across a large book, and on the court timetable. The facility can be signed before the decree and funded on its entry.

Is a NAV loan better than selling fund interests in a divorce?

Selling requires GP consent for each transfer, typically takes weeks to months, and prices at a discount to NAV, with tail-end and venture-heavy books discounted most. A NAV loan raises cash with no disposal, no consent to admit a buyer, and the borrower keeps all future upside. The cost is the interest, which for a capitalising facility compounds until repayment.

Who pays the capital calls after a divorce?

Whoever holds the interest. If interests are transferred, the obligation to fund remaining commitments transfers with them and the original partner is not released. A divorce NAV facility is usually tranched so that one draw covers the settlement and a second covers capital calls as they arrive.