3.2 Calculating NAV

A credit fund's net asset value (NAV) is the number everything else hangs on. Management fees and incentive fees are often calculated from it, LPs' capital accounts add up to it, and BDC shareholders see it as NAV per share. PE101 4.3 introduced NAV and capital accounts for a buyout fund; this lesson builds the NAV of a direct lending fund line by line.

The structure is simple: what the fund owns, less what it owes. The work is in the details: valuing loans that rarely trade, accruing interest that hasn't been paid yet, and recording borrowing and fees correctly. The worked example is Kestrel Point Direct Lending Fund I at a quarter-end.

The NAV statement

The following example is illustrative. At quarter-end, the fund's statement of assets and liabilities looks like this:

NAV = total assets − total liabilities = $500.0m − $153.0m = $347.0m.

Notice how much the credit facility matters. The fund holds $480m of loans with only $347m of equity, because it has borrowed $150m against its portfolio (lesson 3.1). That leverage raises returns when the loans perform, but a fall in loan values hits NAV in full: a 1% fall in the loans ($4.8m) reduces NAV by about 1.4%.

Who produces this? Commonly the fund administrator calculates NAV from the fund's records, and the manager's finance team reviews it; in some funds the manager does the calculation and the administrator checks it. NAV isn't final on the quarter-end date itself. The team first has to reconcile cash and positions, book accruals, and wait for the quarter's loan valuations to be approved, which can take several weeks. Quarterly NAVs are usually unaudited; the annual figures are audited.

The assets

Loans at fair value. Investment funds commonly carry their loans at fair value (ASC 820 in the US). Private loans rarely trade, so there's no market price, and most are Level 3: valued mainly with unobservable inputs. As PC101 4.2 and PE101 4.3 explained, the fund follows a written valuation policy, commonly using a yield analysis (comparing the loan's yield with current yields for similar risk) and checks that the borrower's value comfortably covers its debt. A valuation committee approves the marks, and many managers use third-party valuation firms to prepare or review some or all of them each quarter.

The fund still tracks each loan's amortized cost (lesson 2.1), which rises with OID accretion and with PIK interest added to principal (lesson 2.2). The two measures do different jobs:

The difference between them is unrealized appreciation or depreciation. Illustratively, if the fund's loans had a total amortized cost of $500.0m, the $480.0m fair value would mean $20.0m of cumulative net unrealized depreciation. One consequence for PIK: accruing PIK raises amortized cost, but if the borrower is weak, fair value may not rise with it, and the gap appears as unrealized depreciation.

Interest receivable. Interest periods rarely end on the quarter-end date, so at the close the fund has earned interest that borrowers haven't paid yet. It's accrued as a receivable (for the Alder Ridge loan, using the rate and day count from lesson 1.2). Under many funds' policies, loan fair values are measured excluding accrued interest, so the interest isn't counted twice. Loans on non-accrual status (lesson 2.3) don't add to this line.

Cash. Cash at the bank or custodian, reconciled to statements at the close (lesson 4.1).

The liabilities

• Credit facility. The amount drawn on the fund's borrowing, whether a subscription line or asset-based leverage. Interest owed on it but not yet paid is also accrued, often within other payables.
• Accrued management fee. The fee earned by the manager for the period but not yet paid. It's commonly based on NAV, invested capital or gross assets, depending on the fund's terms.
• Accrued incentive fee. The incentive fee, or for a private fund with a whole-fund waterfall the carried interest, earned to date on the fund's results so far (lesson 3.3). Many funds also accrue a capital gains incentive fee on the basis that unrealized gains were realized, even though it isn't yet payable.
• Other payables. Audit, legal, administration and other expenses incurred but not yet paid, and any amounts owed for loan purchases not yet settled.

Getting accruals right matters because every accrual moves NAV dollar for dollar. An incentive fee accrued at the wrong amount changes NAV, and with it every LP's capital account.

Rolling NAV forward

Fund accountants check the closing NAV by rolling it forward from the opening figure, the same way PE101 4.3 rolled forward a capital account.

The following example is illustrative.

Net investment income (NII) is interest and fee income, including OID accretion and PIK, less expenses: interest on the credit facility, management and incentive fees, and other fund costs. Realized gains or losses arise when a loan is repaid, sold or restructured for more or less than its amortized cost. There were none this quarter. Unrealized changes are movements in the gap between fair value and amortized cost on loans still held: here the gap widened by $3.0m in the quarter, taking cumulative net unrealized depreciation to the $20.0m above. The $12.0m distribution is the one from lesson 3.1.

The check: $340.0m + $10.0m + $12.0m − $3.0m − $12.0m = $347.0m, which agrees to the NAV statement. If it didn't, something is missing: an unrecorded accrual, a misclassified cash movement or a valuation not yet posted.

From NAV to investors

LP funds: capital accounts. In a limited partnership, NAV is allocated to each partner's capital account (PE101 4.3). In the simplest case, each LP's share follows its share of commitments. The 10% LP from lesson 3.1 has a capital account of 10% × $347.0m = $34.7m, and its own roll-forward is 10% of each fund-level line:

In practice, allocations are often not strictly pro rata. Side letters may give some LPs lower fees, LPs that joined at later closings may have paid equalization amounts, and part of the fund's profit may be allocated to the GP as carried interest. The administrator's allocation engine handles these, and the capital accounts, plus any GP allocation, must still add up to the fund's NAV.

BDCs: NAV per share. A BDC is a company, so investors own shares rather than capital accounts. It reports NAV per share: NAV ÷ shares outstanding. Illustratively, a BDC with the same $347.0m NAV and 17.35 million shares would have NAV per share of $20.00. Non-traded BDCs commonly issue and redeem shares at or near NAV per share, so an error in NAV directly moves money between investors. For listed BDCs, the share price can trade above or below NAV per share (PC101 4.2).

Key terms

• Net asset value (NAV): A fund's total assets less its total liabilities.
• Level 3: The fair value category for assets valued mainly with unobservable inputs.
• Valuation policy: The fund's written rules for how, how often and by whom its investments are valued.
• Interest receivable: Interest earned but not yet paid by borrowers.
• Unrealized appreciation or depreciation: The difference between an investment's fair value and its amortized cost.
• Net investment income (NII): Interest and fee income less the fund's expenses, including interest on borrowing and fees.
• NAV per share: A BDC's NAV divided by the number of shares outstanding.

Key takeaways

• NAV is total assets less total liabilities; Kestrel Point's is $500.0m − $153.0m = $347.0m.
• Loans are commonly carried at fair value, mostly Level 3, while amortized cost still drives interest income; the gap is unrealized appreciation or depreciation.
• Accruals for interest receivable, fees and expenses move NAV dollar for dollar, so they're checked with a roll-forward.
• LP funds allocate NAV to capital accounts (a 10% LP holds $34.7m); BDCs report NAV per share instead.