Originally published in PEI Private Credit in September 2026.

‍When underwriting a NAV loan, what really matters in the underwriting process, and how do you protect it?

When you’re lending money and assessing a credit, you must understand the key drivers of your safety. If you don’t have clarity on what matters, and how to protect it, you may be distracted by things that aren’t core.

Once you know what matters to you, you can then use your covenant package and structuring to protect those items. But if you do it in reverse order, and you just start throwing covenants around, then you may not be protecting what actually is going to drive the safety of the credit over the course of the loan.

What, then, are the credit criteria that matter for lenders providing NAV finance?

You always want to make sure that you have good diversity in the portfolio. There may be five or 10 companies in a portfolio, but not all of them will be of the same importance. Then, there is leverage. You don’t want to be over levered in terms of your loan-to-value.

That said, just because something has a headline leverage number or headline diversity, it isn’t necessarily a better credit. This is where research and due diligence come in. You have to understand what really matters, and not just what a deal looks like on the surface.

NAV loan underwriting is grounded in portfolio valuations. How much confidence can a lender place in a sponsor’s reported marks?

Valuation has been a particularly hot topic lately, and for good reason. Just because a sponsor says that an asset is worth a certain value, doesn’t mean that it is, so a lender underwriting a NAV loan has to really look at the resilience of the valuation.

The NAV lender may only be lending a relatively small amount of money, as the LTV ratio will be low, and that’s fine, but only as long as the LTV is relatively correct. If there’s something that makes the value of a credit go to zero, then you have a problem.

To that end, we look at binary risks because those are the risks that can make a value jump down quickly. These are risks like customer concentration, regulatory risk or a commodity risk that impacts a specific input.

It could also be capital structure. If the lenders to a portfolio asset at company level exercise their rights under their credit facility and take the keys, then it doesn’t matter how good the equity thesis was.

Sponsor alignment comes up often in NAV lending. How do you think about maintaining that alignment as the private equity portfolio you lent against matures and evolves?

A good NAV loan is a function of a good portfolio and good sponsor. Both are necessary. In the lower mid-market, where we operate, it is a little harder to figure out sponsor quality. Things happen, and, particularly in this environment, not everybody is going to go on to have a successful franchise.

So, you have to ensure that the alignment is there. Alignment depends on the GP always feeling motivated to pay you back and ensuring that there isn’t a big gap between the GP trying to realise equity value at all costs versus taking care of their debt obligations.

When that gap becomes too wide, alignment fractures because the GP may do things that suit their equity needs, but not necessarily their debt obligations. It’s not that they’ll default right away, but it can mean that they neglect taking care of their debt in a timely manner if it crystallises bad outcomes on their equity. They’d rather play out the option value.

To manage that, we want to make sure the sponsor has a good franchise and has been relatively successful. If a GP has built a franchise, they are going to protect that franchise, and that means they can’t afford to default on a fund-level loan.

You also have to make sure that things don’t change later in the life of the loan, and things can change, because portfolios develop. If the portfolio is not progressing the way a GP thought it might, a GP could swing for the fences on the equity, and that could put you out of alignment.

When you understand these dynamics, you can set the right covenants and ensure that not too much sand slips between your fingers, in terms of portfolio realisations sent back to their LPs, before you get repaid.

What investment decision biases do you worry the most about, and how do you mitigate them?

Each time someone originates a deal, the chances are that they will be less critical of that deal than someone else’s deal. That is just human psychology.

Managing that means you need to have a robust investment committee that provides rigorous checks and balances. You must challenge each other thoroughly but respectfully, and make sure that you’re thinking about each deal on its own merits.

If you’ve been in a deal for a little while and something changes, there is also a tendency to just continue with the deal. What I tell people is don’t let inertia carry you to a place that you shouldn’t be. Anytime there’s an amendment or a default, or anything like that, pretend you’ve never seen the deal before. That generally helps eliminate the bias and supports better decision-making.

In a competitive market where price wins many deals, how do NAV lenders stay disciplined?

More competition does put more pressure on terms and pricing. That’s just a natural byproduct of a developing market.

How can a lender manage that? At Hark, we focus on the lower mid-market, because there are better barriers to entry. It takes more work and accumulated experience to assess sponsor quality and figure out structuring. You also have to be more thoughtful and flexible on items like prepayments and covenants.

We strive to provide what we call ‘White Glove Execution’ to our sponsors – a differentiated experience in terms of speed and hassle. Sponsors in the lower mid-market tend to have fewer excess resources and value that, as opposed to looking exclusively at price.

Looking forward, how do you see the NAV lending market evolving from here?

NAV finance has established itself as a permanent asset class, and it will continue to serve as a helpful tool both for accretive acquisitions and defensive positions where sponsors require more capital.

As the market grows, it will continue to evolve. Just as in equity investing or bond investing, there are plenty of different levels of risk to play in. Lenders will find their niches.