How it works
A fund reaches year eight or nine of a ten-year life. It owns a dozen private companies. Its investors — pension funds, endowments, insurers — want their money back, because they were told they would have it by now. The exit routes that were supposed to return it are shut or unattractive: nobody is buying at the price the fund has been carrying these companies at, and selling lower would crystallise a loss and wreck the fund's reported returns.
So the fund borrows instead. It pledges the whole portfolio — every holding, together, as one blended pool of collateral — and a lender advances cash against a fraction of the stated net asset value. The loan sits above the equity in the capital structure, typically at the fund level or in a holding vehicle above the assets, often through a . It is repaid out of whatever the portfolio eventually generates, whenever that happens. In the meantime the interest is frequently rather than in cash, because cash is the thing the fund did not have.
Round invented numbers, to show the shape. A fund carries its holdings at $1bn. It borrows $200m against them, a 20% loan-to-value, at 12% accruing. It pays the $200m out to its investors, who record a distribution and are pleased. Nothing has been sold, nothing has been valued by a buyer, and the fund now owes $200m ahead of those same investors' claims. If the portfolio turns out to be worth $750m rather than $1bn, the loan-to-value is 27%, the lender is still whole, and the loss lands entirely on the equity.
Not a subscription line
The distinction that matters is with the other thing funds borrow against. A subscription line is secured by investors' unfunded commitments — contractual obligations of large institutions to hand over money when asked. That is real, checkable collateral. A NAV loan is secured by the manager's own opinion of what the manager's own assets are worth. It is a , not a price.
Why it matters to this crash
On 19 August 2026 we wrote about Tricolor, where the SEC has sued three former executives over $1.9bn raised on collateral that was not what the documents said it was — the same used cars pledged to more than one lender. The point we drew from it was structural rather than lurid: in , collateral is described in documents rather than independently inspected, and a false description can survive for years because the verification is contractual, not physical. Nobody walks the lot.
A NAV loan is that condition in its purest form, and without anyone needing to lie. There is no lot to walk. The collateral is a set of companies whose value is determined by the same firm that wants the loan, using a methodology it selects, reviewed by a valuation agent it hires. A car at least exists somewhere and can, in principle, be found. A private company's cannot be found. It can only be argued about.
The layering compounds it. A single portfolio company can carry its own leveraged loan, sit inside a fund that has taken a NAV loan against the whole portfolio, and appear as a holding in a or a continuation vehicle that has borrowed elsewhere. None of this is fraud. Every layer is disclosed to the people at that layer. What nobody has is the consolidated picture of how many times one set of cash flows has been promised.
What would make this dangerous
Watch for loan-to-value breaches becoming public. A NAV loan's protection is the gap between the loan and the stated value of the collateral, and that gap is defended by a tested against valuations the borrower produces. If marks fall far enough to trip those tests, the cure is usually to sell assets — into the same closed market that caused the borrowing in the first place. Forced selling produces observable transaction prices, and observable prices are the thing that revalues everybody else's portfolio.
The second signal is the purpose of the borrowing. NAV loans raised to fund a genuinely accretive follow-on investment are ordinary corporate finance. NAV loans raised to fund distributions are a fund paying its investors with borrowed money and calling it a return. If the proportion tilts toward the latter across a vintage, distributions stop being evidence of anything.
Third, watch for the same asset appearing as collateral at two levels of one structure without the lenders at either level knowing. That is the Tricolor mechanic transposed into a market with no titles, no registry, and no lot to walk. We have not covered the size of this market and will not guess at it.