Private credit has expanded well beyond traditional direct lending, with institutional investors increasingly exploring specialized financing strategies for diversification and additional sources of return. For Danish pension fund P+, traditional private credit remains an important portfolio component, but financing secured against private equity portfolios is attracting growing interest. Mikkel Loft, Director responsible for private credit investments at P+, sees opportunities in both net asset value (NAV) lending and general partner (GP) financing.
P+ allocates to private credit within its private investments portfolio, where the allocation serves two main purposes: generating recurring income and capturing an illiquidity premium relative to publicly traded credit markets. “The two main purposes are to act as a diversifier and to generate running income from the portfolio. At the same time, we want to capture an illiquidity premium compared with the liquid credit markets and achieve a higher yield,” Loft says.
“The two main purposes [of private credit]are to act as a diversifier and to generate running income from the portfolio. At the same time, we want to capture an illiquidity premium compared with the liquid credit markets and achieve a higher yield.”
Mikkel Loft, Director responsible for private credit investments at P+.
Within P+’s private credit portfolio, portfolio financing has emerged as an area of particular interest for Loft and his team. This includes NAV financing, where loans are secured against a fund’s underlying investments, and GP financing, which provides liquidity to private equity managers against their future economic interests.
“One of the key drivers [behind portfolio financing]is the significant growth of the private equity sector as a whole. The other, less positive driver is the slowdown in exits, which means more capital is remaining locked within the ecosystem.”
Mikkel Loft, Director responsible for private credit investments at P+.
The growth of private equity and slower exit activity have helped drive demand for these solutions. “One of the key drivers is the significant growth of the private equity sector as a whole,” Loft explains. “The other, less positive driver is the slowdown in exits, which means more capital is remaining locked within the ecosystem.” He sees these structures as a natural evolution of private equity financing, moving beyond subscription lines towards financing at the portfolio level.
Diversification and Downside Protection
One attraction of portfolio financing is the opportunity to diversify exposure across multiple underlying investments rather than rely on a single borrower. A NAV facility is secured against a portfolio of investments. “Even though some say it is leverage on leverage, a low LTV combined with the portfolio effect can more than make up for it,” Loft says.
The lender’s position in the capital structure provides another potential layer of protection. NAV financing generally ranks ahead of the fund’s equity, giving lenders priority over equity investors in the repayment waterfall, subject to the transaction’s terms and security arrangements. “You also come in ahead of the equity,” Loft explains. “When there are exits, the lenders are paid before the equity investors.”
NAV Financing: Investment-Grade Returns with a Different Cash-Flow Profile
P+ distinguishes between NAV and GP financing when assessing their place in the portfolio. NAV loans typically fall within its investment-grade bucket, which accounts for approximately one-third of P+’s private credit investments. The remaining two-thirds is allocated to higher-yielding strategies.
Loft sees NAV financing as an opportunity to earn an attractive premium over conventional investment-grade credit. “NAV loans would typically fall within the investment-grade bucket, but they can offer a premium over other investment-grade assets, which makes them particularly attractive,” he says. “At +300 basis points, you are at the higher end of the investment-grade spectrum, so NAV loans offer a higher yield than many other investment-grade assets.”
“NAV loans would typically fall within the investment-grade bucket, but they can offer a premium over other investment-grade assets, which makes them particularly attractive.”
Mikkel Loft, Director responsible for private credit investments at P+.
The return profile can also differ from conventional credit. Some NAV facilities are cash-pay, while others use payment-in-kind (PIK) interest, which accrues to the loan balance rather than being paid out regularly. “Where a facility is PIK, the return is more back-ended because the interest accrues rather than being paid in cash. Cash flow therefore depends more on exits in the underlying portfolio, with repayment typically coming through cash sweeps,” Loft explains. “We look at the mix across the portfolio rather than at any one facility.”
P+ also scrutinizes how borrowers use NAV facilities. Loft is wary of transactions designed primarily to distribute borrowed proceeds to investors. “What we do not like is when the financing is simply used to distribute money to investors. That is just money in, money out,” he says. P+ instead favors financing with a clear economic rationale, such as giving a portfolio company more time to reach an exit or funding additional acquisitions.
“With a NAV facility in place, you can potentially call 100 percent of the commitments, which can also be an advantage for limited partners.”
Mikkel Loft, Director responsible for private credit investments at P+.
NAV facilities can also help funds manage capital commitments more efficiently. “Normally, without NAV financing, you need to keep some capital available for hedging, costs and other requirements, so perhaps only 85 percent of commitments would be called,” Loft explains. “With a NAV facility in place, you can potentially call 100 percent of the commitments, which can also be an advantage for limited partners.”
GP Financing: Higher Returns and More Complex Risk
GP financing generally sits within P+’s higher-yielding credit allocation. Rather than lending against a fund’s portfolio, the lender finances the general partner or management company, secured against assets such as management fees, carried interest, or stakes in existing and new funds. “The collateral can come from several sources, including carried interest from previous funds, management fees, and stakes in both existing and new funds,” Loft says. Repayment is therefore tied more closely to the GP’s business, future cash flows, and fund performance.
Loft sees several reasons why a GP might seek financing. A manager may have significant value tied up in carried interest but limited liquidity, making it difficult to commit capital to a new fund. GP financing can also support succession or provide an alternative to selling a stake to an external investor. “A manager may have funds that are growing rapidly but has not yet been able to realize the investments. They may have significant value on paper but limited liquidity, and can use collateral from previous funds to make a new commitment,” he explains. “It can also be an alternative to selling a stake in the GP. We have seen managers use financing to buy back shares rather than bring in an outside investor,” Loft adds.
“Normally, GP financing is structured with a minimum MOIC that needs to be repaid, as well as a minimum IRR. If the financing runs longer than expected, the IRR kicks in, and that can become really expensive for the GP. The rate is typically in the double digits.”
Mikkel Loft, Director responsible for private credit investments at P+.
Pricing reflects the risks involved. GP financing agreements commonly specify a minimum multiple on invested capital (MOIC), determining the minimum repayment relative to the original investment. A loan of €10 million with a 1.5x MOIC, for example, requires repayment of €15 million. A minimum internal rate of return (IRR) may apply if repayment takes longer than expected. “Normally, GP financing is structured with a minimum MOIC that needs to be repaid, as well as a minimum IRR. If the financing runs longer than expected, the IRR kicks in, and that can become really expensive for the GP. The rate is typically in the double digits,” Loft explains.
Underwriting, Track Records and Deal Sourcing
P+ typically makes four to five credit investments a year, with relatively large individual commitments. This allows the team to conduct detailed due diligence, but Loft also stresses the importance of sourcing in a market where transactions are often bespoke and depend on relationships with private equity sponsors.
“When we make an investment, we work on it in great depth. We try to map the market and identify the best opportunities. What we believe is particularly important in fund financing is sourcing,” he says. “These transactions are often bespoke, so you need to understand how managers actually access the underlying deals.”
“What we believe is particularly important in fund financing is sourcing. These transactions are often bespoke, so you need to understand how managers actually access the underlying deals.”
Mikkel Loft, Director responsible for private credit investments at P+.
In NAV financing, P+ has worked with an asset manager affiliated with a bank that has an established subscription-line lending business, giving it access to an existing network of private equity relationships. “We saw NAV financing as a natural extension of subscription lines. We worked with an asset manager connected to a bank with a large subscription-line business, so we knew that as these facilities matured, opportunities to provide NAV financing would emerge,” Loft explains.
For GP financing, P+ has relied on large managers with broad networks across direct lending and other private credit strategies. “We work with one of the larger managers, with a substantial direct lending business and other strategies, giving them a broad network of GPs they can engage with,” he says.
For P+, the opportunity in NAV and GP financing rests on partnering with experienced managers capable of sourcing and structuring transactions with an appropriate balance of risk and return. As Loft emphasizes, “Sourcing is key, but you also need strong underwriting expertise and experience in the field.”
“Prolonged benign conditions tend to mask risks until markets are stressed, and that is when manager selection and downside protection become the differentiators.”
Mikkel Loft, Director responsible for private credit investments at P+.
Loft is nonetheless mindful that the portfolio financing strategies have yet to be properly tested. “It has been a long time since private credit went through a real default cycle,” he says. “Prolonged benign conditions tend to mask risks until markets are stressed, and that is when manager selection and downside protection become the differentiators.”
This article is part of HedgeNordic’s “Alternative Fixed Income” publication.
