ILPA's NAV facility guidance: what it means if you are the borrower

ILPA's NAV facility guidance: what it means if you are the borrower

The Institutional Limited Partners Association published NAV-Based Facilities: Guidance for Limited Partners and General Partners on 25 July 2024. It is the only industry-wide statement of what LPs expect when a private equity fund borrows against its portfolio, and most LPAC members have read it. If you are a GP considering a fund-level NAV facility, it is the document your LPAC will measure you against. If you are a family office or individual borrowing against your own fund interests, it does not apply to you, but it explains why your GP may react the way it does. This note sets out what the guidance actually says and what to do about it.

What the guidance covers, and what it does not

The guidance addresses NAV facilities in private equity strategies where the loan is asset-based debt at the fund level. ILPA states that it does not address secondaries funds, private credit funds or closed-end real estate funds, and it does not cover an LP borrowing against its own interests in a fund. Its concern is the fund's balance sheet, not the investor's.

It draws on a Fund Finance Association estimate that about 80% of NAV facilities have been used to support portfolio companies and about 20% to fund distributions. Almost everything LPs object to sits in the 20%.

The consent rule

The guidance sets out a simple flow. If the fund's limited partnership agreement does not explicitly permit a NAV facility, seek LPAC consent before putting one in place, whatever the use of proceeds. If the proceeds will fund a distribution to LPs, seek LPAC approval regardless of what the LPA says. If the LPA permits the facility and the proceeds will support the portfolio, inform the LPAC of the intent and rationale and disclose the facility to all LPs once it is in place. Conflicts of interest go to the LPAC in every case.

For a borrower the practical point is timing. LPAC approval is a condition precedent lenders now ask about, and a committee that first hears of the facility when the term sheet is signed will slow the process more than one that was briefed when the idea was formed.

The four things to disclose before closing

ILPA asks GPs to bring four items to the LPAC before a facility is put in place:

1. Rationale and use of proceeds, including the alternatives considered, such as company-level financing, realisations or a continuation fund.

2. Size, structure and controls: facility size, amounts drawn at closing and undrawn, use of an SPV, subordination, cross-collateralisation, repayment requirements including cash sweeps, key covenants, and whether the facility is secured.

3. Key economic terms: cost of capital, fixed or floating, cash or PIK interest, maturity, and covenants, to the extent the lender permits disclosure.

4. LP obligations: any new obligations on LPs, in particular whether distributions funded by the facility are recallable.

A lender that cannot give you clear answers on all four before you go to the LPAC is not ready to lend. Ask for the term sheet in a form you can share.

Ongoing reporting

The guidance does not set a frequency. It points to the ILPA Model LPA, which requires reporting of fund debt until final liquidation and, for each credit facility, the balance, days outstanding per drawdown, current use of proceeds, net IRR with and without the facility, facility terms including fees, and total cost to the fund. Separately it recommends a standard set of disclosures to all LPs once a facility is in place: rationale, size, amounts borrowed, loan-to-value at the initial borrowing date, interest rate and term. In practice this means a NAV facility line in every quarterly report, with the IRR shown both ways.

Leverage limits and the SPV question

Many NAV facilities are made to a holding company below the fund that aggregates the pledged assets. Some GPs have treated that structure as outside the LPA's fund-level leverage limit. ILPA's position is that NAV facilities count towards the limit however they are structured, and it offers sample LPA language defining a "NAV-based facility" and a "Borrowing Subsidiary" and capping aggregate borrowing as a percentage of commitments. If your LPA has a leverage cap, assume the LPAC will apply it to the holdco facility and size the loan inside it.

Recallable distributions and cross-collateralisation

Two features draw particular criticism. Distributions funded by a NAV facility are often recallable if the facility breaches its loan-to-value covenant, which ILPA describes as extremely disruptive for LPs who have redeployed the cash. And a facility secured on the whole portfolio exposes the strong performers to a problem in the weak ones. If you can structure the facility as non-recallable, with security limited to a defined pool and a cash sweep rather than a recall as the cure, you remove most of what the LPAC will object to.

If you are the LP borrowing against your own interests

The guidance does not cover a family office or individual that pledges its own fund interests to a lender. Your fund's LPAC has no say, and no disclosure to other LPs is owed. What does apply is the fund agreement itself: transfer and pledge restrictions, GP consent rights and, in some funds, a prohibition on encumbering the interest at all. Lenders deal with this by taking security over the holding company that owns the interests rather than over the interests directly, which is why the structure of your holding vehicle matters more than the LPA text. The GP will often still ask questions, and the answer that satisfies most of them is that nothing has been transferred.

What to do before you call a lender

For a GP: read the LPA's borrowing and leverage clauses, decide whether the use of proceeds is portfolio support or distribution, brief the LPAC chair early, and prepare the four disclosures in a page. For a family office: pull the transfer and pledge clauses from each fund agreement in the proposed collateral pool and confirm the interests sit in a holding company you can pledge. In both cases the work takes a week and shortens the lending process by more than that.

Key takeaways

• ILPA's guidance applies to fund-level NAV facilities in private equity, not to an LP borrowing against its own interests.

• Seek LPAC consent if the LPA is silent, and always if proceeds fund a distribution.

• Prepare four disclosures: rationale and alternatives, size and structure, economic terms, and any new LP obligations.

• Assume a holdco or SPV facility counts towards the LPA's leverage cap.

Frequently asked questions

Does a GP need LPAC consent for a NAV loan?

Under ILPA's 2024 guidance, yes if the LPA does not explicitly permit one, and yes in every case where the proceeds fund a distribution. Where the LPA permits the facility and proceeds support the portfolio, the LPAC should be informed and all LPs told once the facility is in place.

Does ILPA's NAV guidance apply to a family office borrowing against its fund interests?

No. The guidance covers borrowing by the fund itself. An LP pledging its own interests is governed by the fund agreement's transfer and pledge clauses, not by ILPA's recommendations.

Do NAV facilities count towards a fund's leverage limit if made through an SPV?

ILPA's position is that they do, regardless of structure, and it recommends LPA language that says so expressly.

What should a GP report to LPs about a NAV facility?

Rationale, size, amounts borrowed, loan-to-value at first draw, interest rate and term when the facility is put in place, and thereafter the balance, use of proceeds, cost and net IRR with and without the facility in regular fund reporting.

Sources

• ILPA, NAV-Based Facilities: Guidance for Limited Partners and General Partners, July 2024

• ILPA, press release, 25 July 2024

• Mayer Brown, NAV Facilities: The Institutional Limited Partners Association's New Guidance, October 2024

• DLA Piper, ILPA releases new NAV facilities guidance, August 2024