What happens when an LP defaults?

LP defaults remain one of the most disruptive events a GP can face. According to Preqin, approximately 5–7% of capital calls went unmet or were delayed across private equity funds during 2023–2024, a figure that has edged higher as interest rates, denominator effects, and liquidity constraints squeeze allocators. For GPs managing deployment timelines and for family offices navigating over-commitment strategies, NAV-based lending offers a pragmatic solution that is increasingly becoming part of the standard toolkit.

The GP's Perspective: Protecting the Fund When an LP Fails to Pay

When a limited partner defaults on a capital call, the consequences cascade quickly. The fund's ability to close acquisitions, fund follow-on investments, or meet working-capital needs at portfolio companies is immediately compromised. Traditional remedies — enforcing default provisions, diluting the LP's interest, or forfeiting their commitment — take time and often recover only a fraction of the shortfall. Fund Finance Association data suggests default enforcement processes typically take 6–18 months, during which the fund operates with a hole in its balance sheet.

A NAV loan addresses this gap directly. By borrowing against the net asset value of the fund's existing portfolio, the GP can replace the missing capital call proceeds within days rather than months. The fund's investment programme continues uninterrupted, co-investors are not disadvantaged, and portfolio companies receive the capital they were promised.

Crucially, the economics can be favourable, depending on portfolio diversification and loan-to-value, which typically ranges between 10–25% of NAV. Compare that with the opportunity cost of a missed deal or a forced asset sale at a discount, and the calculus is clear.

There is a governance dimension too. Deploying a NAV facility to cover an LP default avoids the reputational damage of publicising a default to the wider LP base or invoking punitive contractual remedies that can sour relationships with prospective investors in future fundraises. In a market where Bain & Company reported global PE fundraising fell 20% in 2023, maintaining LP confidence is not a secondary concern — it is existential.

The Family Office Perspective: Managing an Approaching Default

For a family office facing a potential default, the situation is equally stressful but the options are different. Over-commitment ratios among family offices have risen markedly; a 2024 UBS Global Family Office Report found that 35% of family offices had increased their private markets allocation over the prior year, with many running commitment-to-NAV ratios above 1.5x. When distributions slow — as they have, with PE exit values down roughly 40% from 2021 peaks — the mismatch between commitments and available liquidity becomes acute.

Before defaulting, a family office can explore a NAV loan against its own portfolio of fund interests. By pledging a diversified book of LP stakes as collateral, the office can borrow sufficient liquidity to meet upcoming capital calls without being forced into a secondary sale at a discount. Secondary pricing for LP interests averaged 84–88 cents on the dollar in late 2024 according to Jefferies, meaning a forced sale crystallises a 12–16% loss that a short-term NAV facility would avoid entirely.

The family office retains its fund positions, continues to participate in future distributions, and avoids the operational complexity and signalling risk of a secondary market transaction. When distributions resume — as they inevitably do through the cycle — the NAV loan is repaid and the portfolio remains intact.

Conclusion

NAV lending is not a panacea, and it requires rigorous underwriting of the underlying portfolio. But as a bridge across the liquidity gap that an LP default creates, it serves both sides of the equation. GPs maintain fund integrity and deployment pace; family offices preserve their positions and avoid value-destructive forced sales. In a market where capital call lines are shortening and distribution timelines are lengthening, NAV lending has moved from niche product to essential infrastructure.