NAV lending, a financing mechanism that allows private equity funds to borrow against their net asset value (NAV), is gaining attention as an alternative to traditional bank loans.
ACA Group, which offers scalable compliance, risk and technology solutions, recently delved into NAV Lending and regulatory considerations related to it.
Advisers are increasingly leveraging this tool to meet extended cash needs, particularly in a market environment that demands funds hold assets longer than expected. However, this trend has drawn scrutiny from regulatory bodies, including the U.S. Securities and Exchange Commission (SEC).
The SEC Division of Examinations recently listed private funds’ use of debt and lines of credit as a key area of regulatory risk in its 2025 Examination Priorities. This focus underscores growing concerns over the cost, risks, and conflicts of interest associated with NAV lending, which may expose investors to substantial financial and operational burdens.
NAV lending provides liquidity to private equity and credit funds when traditional borrowing options prove inadequate. Funds can use NAV loans to finance follow-on investments, operational expenses, or other needs. The mechanism is particularly valuable when liquid capital has been fully deployed, offering a strategic solution in turbulent market conditions marked by dislocation, volatility, and elevated interest rates. However, it comes with higher financing costs, operational diligence, and legal complexities, given the nature of the collateral involved.
The risks of NAV lending include significant financing costs due to the longer repayment terms and illiquidity of pledged assets. Funds also face increased legal obligations, financial covenants, and higher operational costs stemming from lender diligence. If the market turns unfavourably, funds risk default and may be forced to liquidate pledged assets, intensifying liquidity pressures. This situation creates conflicts of interest as borrowing increases fund assets—and consequently manager fees—while investors bear the risks.
To mitigate these risks, private fund managers must prioritise transparency and robust governance practices. Disclosure documents should clearly outline NAV lending’s purpose, risks, and associated conflicts of interest. Managers should establish rigorous valuation policies to ensure asset integrity, addressing the risk of overvaluation to secure higher loan proceeds.
The SEC has made it clear that it will examine private fund managers’ policies and practices around leverage, with a particular focus on valuation procedures and market volatility. Managers are encouraged to maintain clear records demonstrating compliance with FASB standards and to communicate regularly with investors regarding leverage, NAV loans, and their impact on fund performance.
As regulatory scrutiny intensifies, firms must navigate a complex compliance landscape. Compliance advisory services like ACA Signature offer tailored solutions to help firms manage risk effectively. By combining technology, managed services, and cybersecurity, firms can ensure they remain aligned with emerging regulations while addressing their unique operational challenges.
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