By Lou Sokolovskiy
Net Asset Value (NAV) based lending—once a niche solution for seasoned private equity funds—is gaining traction as both a strategic liquidity tool for institutional investors and a direct source of flexible credit for asset-rich small and mid-size businesses (SMBs). Market participants expect the NAV lending market to expand from $44 billion in 2023 to $145 billion by 2030, according to Oaktree Capital Management.
A Shift From IRR to DPI
Private equity firms, sitting on an estimated $3.2 trillion in unrealized value across 28,000 companies, are turning to NAV loans as traditional exit routes like IPOs and M&A remain largely dormant. According to Upwelling Capital Group, annual distributions from buyout funds plunged from 39% in 2021 to just 13% by mid-2023—the lowest in over a decade.
The result? A sharp pivot from on-paper returns (IRR) to cash-on-cash metrics like DPI (Distributions to Paid-In Capital). NAV loans, secured by the aggregate value of a fund’s portfolio, allow managers to generate liquidity and meet LP demands without forced exits at fire-sale prices.
“Decreased M&A activity, wide bid-ask spreads for secondary transactions, and increased financing cost for portfolio companies are the key reasons,” read the Upwelling report published last year.
A Capital Bridge to SMBs
While NAV lending was once strictly a fund-level strategy, its influence now extends into the real economy. Much of the borrowed capital is being deployed directly into SMBs within private equity portfolios. Uses range from bolt-on acquisitions to growth capex and refinancing higher-cost debt.
“In the right circumstances, NAV loans are excellent options for creating liquidity within an illiquid fund,” said Mark Thylin, Head of Structured Fund Solutions at Silicon Valley Bank, in an article published in May.
But the bigger story in 2025 is NAV lending’s evolution from an indirect source of capital to a direct credit option for standalone SMBs.
Banks like Customers Bank are pioneering NAV-based facilities that assess the total net asset value of an independent business’s entire portfolio—including real estate, inventory, intellectual property, and receivables—as collateral.
“NAV lending is not without risk,” says the bank, “but NAV loans are typically less risky than other types of loans because they are secured by the value of the assets used as collateral.”
Private Credit’s Growing Role
The rise of NAV lending aligns with the dramatic growth of the private credit market, now estimated at $1.7 trillion in assets under management and is estimated to climb to $2.64 trillion in 2029, according to Preqin. With traditional banks pulling back due to Basel III and Dodd-Frank constraints, private lenders are filling the void.
These lenders, unencumbered by regulatory capital reserve requirements, are underwriting more complex and bespoke risks.
“Due to strict capital reserve requirements imposed on banks,” wrote Sarie Diloné and David Wong in a Callan blog post in March, “NAV loans are now primarily provided by specialist private credit funds, some of which are stand-alone NAV finance-focused managers.”
A Bifurcated Credit Market
For most SMBs, the current borrowing environment appears fraught. With the Federal Reserve holding rates in the 4.25% to 4.50% range amid inflation and trade concerns, many businesses are encountering a “split” credit market.
“Liquidity constraints remain a big issue across the board,” said Phil Sheridan, SVP at Wintrust Financial Corporation. “Good borrowers will see competition, but those with blemishes may face higher rates or stricter terms.”
For the rest, NAV lending offers a vital alternative—especially for companies seeking to invest in automation, expand operations, or attract talent amid ongoing labor shortages. According to a Corpay survey, 85% of SMBs remain optimistic about growth in 2025, with 89% planning to implement AI technology this year.
Risks and Regulatory Scrutiny
The swift rise of NAV-based lending has drawn increasing scrutiny from regulators and investor advocates, who warn that the opaque nature of these transactions may obscure key risks. The Institutional Limited Partners Association, a prominent voice for institutional investors, has called for heightened transparency around such deals, urging that fund managers seek approval from their Limited Partner Advisory Committees before using NAV facilities to finance distributions.
Federal regulators are also taking notice. In its 2025 examination priorities, the Securities and Exchange Commission flagged fund-level leverage—including NAV-based loans—as an area of heightened focus. Officials cited concerns around valuation methodologies, potential conflicts of interest, and the systemic vulnerabilities introduced by cross-collateralized assets.
A Financial Frontier Redrawn
Despite the risks, industry participants believe the NAV lending market is just getting started. Partners Group’s 2025 Private Credit outlook projects the market to scale to $600 billion by 2030, particularly as smaller funds and direct-to-business models gain traction.
For SMBs, understanding NAV-based financing—and establishing relationships with non-bank lenders—is quickly becoming a strategic imperative.
As legacy lending models continue to fragment under macroeconomic and regulatory pressures, NAV-based lending may well become the new default for sophisticated, asset-driven businesses seeking to compete—and grow—on their own terms.
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Aug. 2025
