Can My Fund Take Out a Net Asset Value (NAV) Loan Without LP Consent? 

The distributions just hit. Returns look strong. Investors are finally seeing cash come back. 

But where did that cash actually come from? 

If the fund borrowed against its portfolio to make the distribution, rather than selling an investment, investors should know that before treating the payment like a traditional exit. 

What a NAV Loan Actually Is 

A NAV loan allows a fund to borrow against the value of its existing portfolio companies. 

Funds have long used these loans to manage timing gaps and short-term cash needs. More recently, some funds have used them to fund investor distributions when exits are limited. 

That can make reported returns look stronger even though the cash did not come from the sale of a portfolio company. 

Why Regulators Are Paying Attention 

The SEC has been looking more closely at the use of NAV loans, particularly when borrowed money is used to fund distributions. 

The concern is simple: investors may see strong return figures without realizing that the distribution came from debt rather than an actual exit. 

Consent Is Not Automatic 

Not always. 

Many fund agreements give the general partner broad authority to borrow. But that does not automatically mean every use of borrowed money is covered. 

Before using a NAV loan to fund distributions, review: 

• whether the fund agreement allows borrowing for this purpose 

• whether investors must be notified or give consent 

• whether an investor advisory committee must approve the transaction 

• whether the lender has any relationship with the fund manager that could create a conflict 

Who Gets Paid First If a Portfolio Company Fails 

A NAV lender will usually have priority over investors with respect to the assets securing the loan. 

If the portfolio underperforms, the lender may be repaid before investors receive additional distributions. 

That means a distribution funded with debt can create risk that is not obvious from the return numbers alone. 

Common Founder Mistakes 

• Treating the Loan Like Routine Fund Financing. A fund may assume its general borrowing authority is enough without reviewing whether the agreement actually covers borrowing to fund distributions. That can lead to missed notice, consent, or approval requirements. 

• Looking Only at the Return Numbers. Investors may see a strong return and assume it came from an exit. They should also ask whether the distribution came from a sale or borrowed money and what obligations now sit ahead of them. 

• Failing to Document Conflicts. If the lender has ties to the fund manager or related parties, the potential conflict should be reviewed and documented before the transaction closes. 

10-Minute Self-Check 

Before you sign off on or accept a NAV facility, work through this: 

• Does the fund agreement allow borrowing to fund distributions? 

• Is investor notice or consent required? 

• Is advisory committee approval required?  

• Do we know whether the distribution came from an exit or borrowed money? 

• Who gets paid first if the portfolio underperforms? 

• Are any conflicts with the lender properly documented? 

If you cannot answer yes to all of these, you are not ready to rely on this facility yet. 

Bottom Line 

A NAV loan is not automatically a problem. 

The issue is whether the fund has the authority to use it, whether investors receive the disclosures or approvals required by the fund documents, and whether everyone understands that the distribution came from borrowed money rather than an exit. 

Is My Fund’s NAV Loan Actually Covered by LP Consent? 

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