A NAV loan sits ahead of every LP in the fund. A secondary buyer has to price the interest on the assets and the debt, not on the reported NAV.
Price the interest on the portfolio, not on the reported NAV: project the assets' distributions, pay the facility's interest and principal first under its sweep, and discount what is left to the LPs. On an illustrative fund with 500 of assets, a 100 NAV facility at 9 per cent and 400 of NAV, a 15 per cent IRR supports a probability-weighted price of 88.3 per cent of NAV, against 89.5 per cent for an unlevered fund with the same NAV. The real difference is in the downside: 62.7 per cent against 68.8 per cent.
Worked in full in The Private Equity Secondaries Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
NAV facilities, loans to the fund secured on its portfolio, have become common in mature buyout funds, used to fund follow-ons, bridge exits or make distributions. For a secondary buyer, an LP interest in such a fund is a levered equity position in the portfolio. The reported NAV already deducts the loan, so it is tempting to apply the usual discount to it. That misses two things: the loan is repaid before any LP sees cash, and it amplifies every change in asset values. This is a different question from borrowing to buy the interest, where the buyer's own acquisition facility gears its equity; that case is worked in how leverage changes the IRR of a secondary deal. Here the debt is already inside the fund, and the buyer pays for it in the price.
| Input | Value |
|---|---|
| Portfolio value (gross assets) | 500 |
| NAV facility; loan to value | 100; 20% |
| Reported NAV | 400 |
| Facility interest, accruing; repayment | 9%; 100% cash sweep |
| Portfolio distributions, share of total, years 1 to 4 | 15%, 25%, 30%, 30% |
| Gross multiple on the portfolio: downside, base, upside | 1.00x, 1.30x, 1.60x |
| Probabilities | 25%, 50%, 25% |
| Buyer's target IRR | 15% |
Due to lendert = balancet−1 × (1 + 9%)
Paid to lendert = MIN(portfolio distributiont, duet)
To LPst = portfolio distributiont − paid to lendert
Price = NPV at 15% of the LP distributions. In Excel: =NPV(15%,LP_Flows)
| Year | Portfolio distribution | To lender | Loan balance after | To LPs, levered fund | To LPs, unlevered fund |
|---|---|---|---|---|---|
| 1 | 97.5 | 97.5 | 11.5 | 0.0 | 78.0 |
| 2 | 162.5 | 12.5 | 0.0 | 150.0 | 130.0 |
| 3 | 195.0 | 0.0 | 0.0 | 195.0 | 156.0 |
| 4 | 195.0 | 0.0 | 0.0 | 195.0 | 156.0 |
| Total | 110.0 | 540.0 | 520.0 |
The levered fund returns 540.0 to its LPs, 1.35x of NAV, more than the unlevered fund's 520.0, because 500 of assets earn 1.30x and the lender takes only 110.0. But nothing reaches the LPs in year 1, and the weighted average life of their cash lengthens from 2.75 to 3.08 years. The facility costs 9 per cent while the buyer discounts at 15 per cent, so the extra 20 of LP cash almost pays for its later arrival: the levered interest is worth 353.1, 88.3 per cent of NAV, the unlevered one 357.9, 89.5 per cent.
| Portfolio multiple | Probability | LP multiple of NAV, levered | Price, levered | LP multiple of NAV, unlevered | Price, unlevered |
|---|---|---|---|---|---|
| 1.00x downside | 25% | 0.97x | 62.7% | 1.00x | 68.8% |
| 1.30x base | 50% | 1.35x | 88.3% | 1.30x | 89.5% |
| 1.60x upside | 25% | 1.73x | 114.0% | 1.60x | 110.1% |
| Probability-weighted | 88.3% | 89.5% |
In expectation the facility costs the buyer 1.2 points of NAV. In the downside it costs 6.1 points: if the portfolio only returns its value, the LPs get 0.97x of NAV, because the lender takes 12.1 of interest out of the same distributions before it is repaid. In the upside it pays the buyer 3.8 points. The range of fair prices widens from 41.3 points to 51.2. A NAV facility is leverage on the LP interest, and it changes the shape of the outcome far more than its centre. A 10 per cent fall in asset values is a 12.5 per cent fall in NAV.
| Facility | Loan to value | Weighted price, % of NAV | Implied discount | Downside price, % of NAV |
|---|---|---|---|---|
| 0 | 0.0% | 89.5% | 10.5% | 68.8% |
| 50 | 11.1% | 88.8% | 11.2% | 65.6% |
| 100 | 20.0% | 88.3% | 11.7% | 62.7% |
| 150 | 27.3% | 88.1% | 11.9% | 60.0% |
The weighted discount barely moves with the size of the loan. The downside price falls by about three points for every 50 of facility. A buyer who prices on a single base case sees almost no reason to pay less for the levered fund; a buyer who prices the downside, or whose own fund is concentrated in this interest, sees a reason to pay several points less.
The common error is to quote the price as a percentage of reported NAV and compare it with discounts on unlevered funds, as though the two NAVs were the same asset. They are not: one is 400 of assets, the other is 500 of assets less a senior claim of 100. The second error is to apply the GP's projected portfolio multiple to NAV. A 1.30x on assets is 1.35x on this NAV, and a 1.00x on assets is 0.97x. Rebuild the portfolio company by company, as in pricing an LP interest on a bottom-up NAV, then layer the facility on top with its own rate, sweep and maturity.
In diligence: ask for the facility agreement, not just the balance. The sweep percentage, the LTV covenant and any cross-collateralisation decide when LPs see cash and whether a fall in values can trigger a full sweep. If the facility funded a distribution before the sale, the seller has already taken the cash it is now pricing, as discussed in what a NAV loan distribution does to DPI.
A fund-level NAV facility costs a secondary buyer little in the base case, 1.2 points of NAV here, and a great deal in the downside, 6.1 points. Price the assets, run the loan through the cash flows and weight the scenarios. The deal model of the book, which projects distributions and stresses delay and value together, is in the free workbook for this case.
Yes. NAV is assets less the facility and accrued interest, so the reported figure already deducts the loan. What it does not show is that the loan is repaid first and costs interest. In the illustrative case a 10 per cent fall in asset values cuts NAV by 12.5 per cent, because 500 of assets support 400 of NAV.
Usually a little less in expectation and a lot less in the downside. In the illustrative case the probability-weighted price for a 15 per cent IRR falls by 1.2 points of NAV, to 88.3 per cent, but the 1.00x downside price falls from 68.8 to 62.7 per cent, and the spread between best and worst case widens from 41.3 to 51.2 points.
The sweep sends portfolio distributions to the lender until the facility is repaid, so the buyer's first cash arrives later. In the illustrative fund all 97.5 of year-1 distributions repay the loan and LPs receive nothing until year 2; the weighted average life of the LPs' cash lengthens from 2.75 to 3.08 years.
This article is one calculation from The Private Equity Secondaries Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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