NAV financing is becoming an increasingly important part of the fund finance toolkit in Asia. While subscription facilities still continue to be the predominant fund finance product in the region, NAV facilities and hybrid facilities are increasingly being considered by sponsors as they seek liquidity against the value of their existing portfolios. This development comes against a familiar backdrop that is not unique to Asia: longer holding periods, challenging exit markets and slower fundraising environments all lead to increased demand for liquidity.
However, while APAC is often described as a single market, it is anything but uniform. Funds may be established in one jurisdiction, managed from another and hold investments across Mainland China, Japan, India, Korea, Australia and Southeast Asia, often through multiple layers of holding companies.
In this article, we look at some of the key considerations that face lenders looking to underwrite NAV facilities in the APAC market.
What Is the Portfolio Worth to the Lender?
The starting point for any NAV facility is the value of the underlying portfolio. For an APAC portfolio, the lender may need to look beyond the headline valuation and consider both what the fund owns and how it owns it.
Perhaps more so than other markets across the world, the Asia market is relatively fragmented with different regulatory and legal frameworks across the region, and in some jurisdictions, with limitations on repatriation of funds. This creates additional structuring and enforcement risks for financiers. Ten investments do not necessarily represent ten independent sources of credit support if a substantial proportion of their value is attributable to a single jurisdiction, currency or regulatory environment.
There is no single approach to reflecting those considerations in a NAV facility in APAC. At one end of the spectrum, a sufficiently diversified portfolio may support a relatively straightforward approach, under which the borrowing base or leverage is tested against an aggregate NAV, supplemented by appropriate minimum NAV, leverage and valuation protections.
Other facilities adopt a more granular approach. Individual investments may need to satisfy agreed eligibility criteria before contributing towards the relevant NAV calculation. Concentration limits may cap the amount of value attributable to any single eligible investment (for example, a single eligible investment may not account for more than 15 or 20% of the aggregate eligible NAV). Portfolio diversity requirements may require the fund to retain a minimum number of assets in various specified jurisdictions.
The concept of an eligible investment can also do significantly more work than simply identifying the assets included in the calculation. Eligibility can depend upon ownership through the agreed holding structure, the relevant offshore shares and receivables being subject to transaction security, affirmative lender approval and the absence of specified investment-level events.
Reported NAV tells us how the sponsor values its investments. Eligible NAV asks a different question: how much of that value possesses the characteristics that the lender is prepared to recognise for financing purposes?
That distinction can be particularly important in APAC given the diversity of jurisdictions, holding structures and underlying assets within a single portfolio.
Do the Asset Valuations Need to Be Stress-Tested?
While this is not an issue that is unique to Asia, we have seen increasing scrutiny of fund valuations in Asia lately. As with other markets across the world, NAV facilities (which may sometimes be known as loan-on-loans or back-leverage) have been commonly used among credit funds in Asia. In these financings, the credit fund holds a portfolio of loans that it has invested in. The credit fund assigns by way of security its interests in the loans to support the NAV facility, together with a charge over the bank accounts into which payments of interest and principal from the loans will be paid.
However, the growing use of NAV and back-leverage facilities by private credit funds also places greater emphasis on the robustness of the underlying asset valuations. Private credit funds have been under enhanced regulatory scrutiny lately, including by the Australian Securities and Investments Commission (“ASIC”) in Australia. In the report entitled “ASIC Report 814: Private credit in Australia” released in September 2025, ASIC identified valuations as an area requiring attention. Subsequent commentary on ASIC's findings have highlighted concerns around inconsistent or non-independent valuation methodologies and valuation governance, with ASIC threatening to sue those credit funds who it believes are avoiding write-downs and inflating their books.[1]
For NAV lenders, the methodology, frequency and independence of the asset valuations become relevant not only to investors and regulators, but also to the lender's assessment of eligible NAV and its contractual valuation protections. This will have a bearing on how NAV is calculated and how differences over valuation are resolved. One approach that we have seen is to provide the lender with a NAV challenge mechanism involving an independent approved appraiser where specified conditions are met.
Can the Portfolio Value Become Cash for the Borrower to Service the NAV facility?
This is perhaps where APAC's jurisdictional diversity becomes most significant.
Enterprise value in an underlying portfolio company does not itself repay an offshore NAV facility. Ultimately, that value must generate proceeds and sufficient cash must reach the entity responsible for servicing the debt.
Typically, the facility documentation requires net investment distribution proceeds received by fund obligors to be credited to secured bank accounts. Where the contractual cash-sweep mechanism applies, the relevant entities must exercise their rights to receive investment distribution proceeds, not materially delay or frustrate their receipt, and seek to procure that amounts to which the fund is entitled move up through the structure as soon as reasonably practicable.
However, even if a fund is domiciled in an offshore hub like the Cayman Islands, the underlying operational assets reside onshore. Depending on the relevant jurisdictions and investment structure, restrictions under portfolio-company financing documents, dividend and distribution mechanics, tax leakage, foreign exchange exposure and applicable cross-border remittance requirements may create “trapped cash” that may not easily be upstreamed to service the NAV facility. Assets sitting in jurisdictions with stricter capital controls (such as Mainland China, India and certain South East Asia jurisdictions) may be assigned lower advanced rates when taking them into account in the eligible NAV.
For APAC NAV transactions, it is therefore helpful to distinguish:
- Reported NAV: the value attributed to the portfolio.
- Eligible NAV: the portion of that value which satisfies the facility's agreed eligibility and concentration requirements.
- Debt-serviceable NAV: the value which can ultimately produce cash available at the level from which the facility must be repaid.
Currency adds another dimension. A NAV facility may be denominated in US dollars while its underlying investments are valued or generate cashflows in renminbi, yen, Australian dollars, Indian rupees or several currencies simultaneously. The documentation may therefore need an agreed methodology for translating non-US-dollar investment values into the facility currency, and also impose certain FX hedging requirements.
There is a related security question. Taking direct security over every underlying portfolio investment is not the only way of structuring a NAV facility. The lender may instead rely upon security higher in the ownership chain, including security over offshore holding-company interests, receivables and relevant bank accounts.
Accordingly, it is not sufficient merely to identify value. The financing structure may also need to establish a credible route by which that value can become cash available for debt service. Those amounts may not always be the same.
Key Takeaways
As NAV and hybrid facilities become more popular in Asia, the diversity of jurisdictions, currencies and holding structures means that lenders need to look beyond a fund’s reported NAV and consider how much of that value should constitute eligible NAV. Equally important is whether that value can ultimately be converted into cash available to service the facility, particularly where proceeds must move through multiple entities and jurisdictions, some of which have foreign exchange controls and restrictions. These considerations should flow through into the credit underwriting and facility documentation, and thought should be given by lenders to investment eligibility criteria, concentration and diversification limits, valuation challenge rights and cashflow protections. Ultimately, NAV is the starting point, but not the end of the analysis, and the appropriate financing structure will depend on the particular characteristics of each APAC portfolio.
[1] ASIC threatens legal action against private credit managers for poor governance and misleading valuations.