ACA Group, a provider of scalable technology, risk, and compliance solutions, recently examined NAV lending and its associated regulatory issues.

In a market where funds must hold assets for longer than anticipated, advisers are using this technique more and more to fulfill prolonged cash needs. However, regulatory agencies including the U.S. Securities and Exchange Commission (SEC) have taken notice of this tendency.

In its 2025 Examination Priorities, the SEC Division of Examinations recently identified the usage of debt and credit lines by private funds as a major regulatory risk area. This emphasis highlights the mounting worries over NAV lending's costs, hazards, and conflicts of interest, which might subject investors to significant operational and financial strains.

When conventional borrowing choices are insufficient, NAV lending gives credit funds and private equity firms liquidity. NAV loans can be used by funds to pay for operational costs, follow-on investments, and other requirements. When liquid money is completely used, the mechanism is especially beneficial and provides a strategic solution for volatile, dislocated, and high-interest-rate market situations. However, because of the nature of the collateral involved, it entails more financing expenses, operational scrutiny, and legal complications.

Because of the lengthier payback timeframes and the illiquidity of the pledged assets, NAV lending carries a number of hazards, including high financing costs. Due to lender vigilance, funds also have to deal with more stringent legal requirements, financial constraints, and increasing operating expenses. Funds run the danger of defaulting and could have to sell pledged assets if the market declines, which would increase liquidity constraints. Conflicts of interest arise when investors absorb the risks while borrowing boosts fund assets and, in turn, manager fees.

Transparency and strong governance procedures must be given top priority by private fund managers in order to reduce these dangers. The goal, hazards, and related conflicts of interest of NAV lending should all be spelled out in detail in disclosure papers. In order to protect asset integrity and mitigate the possibility of overvaluation in order to get larger loan proceeds, managers should implement strict value procedures.

The SEC has said unequivocally that it will investigate the rules and practices of private fund managers regarding leverage, paying special attention to market volatility and valuation processes. In addition to keeping transparent records that show adherence to FASB guidelines, managers are urged to keep in regular contact with investors on leverage, NAV loans, and how they affect fund performance.

Businesses must negotiate a challenging compliance environment as regulatory scrutiny increases. ACA Signature and other compliance advice services provide customized solutions to assist businesses in efficiently managing risk. Businesses may make sure they stay in compliance with new standards while tackling their own operational difficulties by integrating technology, managed services, and cybersecurity.