The market for net asset value (“NAV”) credit facilities continues to grow rapidly, with evolving features and mechanics. As the market matures, it brings new opportunities for both borrowers and lenders. Private investment funds and bank lenders are taking advantage of the various benefits that NAV credit facilities can offer. In this Legal Update, we explain the advantages of NAV credit facilities to lenders and borrower funds.

Characteristics of a NAV Credit Facility

A NAV credit facility is a term or revolving credit facility in which a lender provides financing to a fund, with the loan availability based on the net asset value of the fund’s portfolio of investments. NAV credit facilities are often used by private equity funds after the fund has matured beyond its investment period, when it has typically exhausted most of its investor capital commitments. After the investment period, funds generally cannot access borrowing availability under a subscription-backed credit facility because they do not have sufficient remaining uncalled capital commitments. With a subscription-backed credit facility unavailable, the fund may turn to a NAV credit facility to provide the liquidity necessary to manage its portfolio and investment activities.

In NAV credit facilities, the borrowing base is typically determined by applying an advance rate against a subset of the fund’s investment portfolio that are deemed to be eligible investments. To be an eligible investment, the investment must generally meet specific criteria for inclusion and not be subject to certain material investment events described in the facility. Such material investment events may include bankruptcy events, write off, or a significant decline in value. The value of eligible investments in the borrowing base may also be subject to concentration limits, such as sector limitations or thresholds for the ratio of individual investment size to the overall borrowing base.

NAV credit...