Net asset value (NAV) finance—where sponsors borrow against the NAV of the assets in the funds they manage—is growing at pace, and infrastructure managers are using the product in increasing numbers. This includes both portfolio-wide NAV financings as well as single or concentrated back-leverage facilities supported by unsecured recourse to the fund’s NAV.
The NAV finance market, now valued at US$100 billion globally, is forecast to expand sevenfold by 2030 to become a US$700 billion market, according to Pemberton Capital Advisors.
Initially, the uptick in the use of NAV finance was spurred by the increasing appetite of private equity sponsors who have used NAV loans to finance extended portfolio company hold periods (which are currently at two-decade highs) and finance further accretive investments in a flat exit market. During the past 12 months, more infrastructure managers have raised NAV finance too.
A tidy solution
NAV finance has proven particularly useful for infrastructure managers as project timelines and building costs have increased.
According to specialist construction consultancy Currie & Brown, global construction costs are expected to increase by seven percent in 2025. Infrastructure projects are also taking longer to deliver due to the rising costs of construction, byzantine planning processes and budget overruns. According to McKinsey, approximately 98 percent of mega infrastructure projects experience cost overruns that exceed original budgets by 30 percent, and more than three in four (77%) mega projects are at least 40 percent late.
To navigate higher costs and extended timelines, infrastructure managers have had to find additional sources of capital to support portfolio assets. But, after a challenging period for infrastructure fundraising (infrastructure fundraising dropped to a 10-year low in 2024 after three years of consecutive decline) and with senior debt and project finance more expensive following a cycle of rising interest rates, sourcing liquidity from these traditional pools of capital has proven difficult.
Given the constraints on mainstream capital, NAV finance has provided an additional and valuable option for infrastructure managers seeking cash to support portfolio investments.
The structure of a NAV facility—which is secured against a portfolio of assets at the fund level rather than a single asset and has conservative loan-to-value (LTV) ratios typically in the 10 percent to 25 percent range for private equity and infrastructure funds—provides NAV lenders with protection against downside risk and allows infrastructure managers to bring down borrowing costs.
Utilizing a NAV finance facility at the fund level also allows infrastructure managers to raise capital without impacting the covenants and intercreditor agreements governing the capital structures of portfolio companies at the asset level.
Adapting NAV financing to infrastructure
As the use of NAV finance in the infrastructure space has proliferated, NAV lenders have adapted the product to the specific timelines and capital requirements of infrastructure managers.
As infrastructure investment vehicles have longer fund lives than typical private equity funds (between 15 and 20 years on average rather than the 10-year average for buyout funds), NAV lenders are willing to structure NAV loans as either term-out revolving credit facilities (a revolving credit facility that gives the borrower the option to convert any drawdowns from the facility into a term loan), or delayed-draw loans (committed loans that borrowers can draw down when required rather than borrowing a large amount upfront) that managers can access as projects are identified. Buyout NAV facilities secured against assets in fully invested funds, by contrast, are usually structured as single-term loans.
Tenors for infrastructure fund NAV facilities will also be longer than those for buyout funds, reflecting the longer holding periods and fund lifespans in infrastructure.
Focus on structuring
Thoughtful structuring is essential if infrastructure managers are to fully benefit from the additional financing and lower cost of capital that a NAV facility can provide.
When underwriting deals, NAV lenders will be sensitive to concentration risk (where a fund’s investments are too concentrated in certain geographies or asset types), and will also ask for caps on the number of assets that are still in the construction phase or subject to demand risk (the risk that the usage of an infrastructure asset, such as a toll road, will be lower than forecast and impact revenues) and may also pursue ways to limit exposure to commodity risk (including electricity prices) and currency risk.
When structuring NAV facilities, borrowers and issuers will also be sensitive to the fact that it is common for infrastructure funds to not only raise leverage at the level of the underlying project or asset, but to group select individual assets into holding companies that secure additional finance and sit between the underlying assets in a portfolio and the fund.
Even though a NAV facility will sit above both the underlying companies and any holding companies, the additional layers of debt carried by intermediate holding companies can complicate the ability of a NAV lender to enforce its security rights in the event of a default or restructuring.
For example, loan documentation for debt provided at both the portfolio company level and holding company level will typically include change of control provisions that require all debt to be repaid if the ownership of an asset changes. NAV lenders may have security over assets in a fund but enforcing that security in practice can have a detrimental effect if the lenders at the underlying company level enforce their change of control rights. Moreover, there are approvals required from regulators when strategically sensitive infrastructure assets pose similar challenges.
When reviewing the documentation, NAV lenders also have to ensure that intermediate companies that sit between the fund’s NAV and project level debt do not incur borrowing that is structurally senior to the NAV loan but secured against more than one of the underlying assets in the fund, as this dilutes the protection that a diversified portfolio offers the NAV lender.
The use case for NAV financing in infrastructure is proven, and interest in NAV finance from infrastructure managers is on the rise. However, for NAV lenders, taking advantage of this growing segment of the market requires meticulous documentation and an appreciation of the complexities that can come with enforcing collateral rights in practice.
