The Bank of England has raised concerns about increasingly popular NAV financing in the private equity world, due to opacity around the quantity of leverage entering the system.

NAV lending is when a loan is taken on at portfolio level based on net asset value, rather than putting debt onto a single company.

Private equity funds have been taking out NAV loans to boost liquidity, with the proceeds used for investor distributions, to repay portfolios companies’ debt or to purchase new fund assets.

Read more: Boom in NAV financing set to continue

NAV financing, which can be provided by banks or private credit funds, is a booming market, with 17Capital projecting volumes to go from $100bn (£81bn) to $700bn by 2030.

In a speech made at Bloomberg’s offices, Nathanael Benjamin, the Bank’s executive director for financial stability strategy and risk, noted that this type of financing has been termed “leverage on leverage. You can see why.”

“There are natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem,” he said.

Read more: Private debt AUM passed $1.6trn last year amid “explosive” growth

“And I cannot resist pointing out the ironic contradiction in banks on the one hand worried about the threat from non-bank players, but on the other hand keen to help them leverage themselves up.

“There are also questions about the liquidity of the underlying collateral, particularly in a stress. Indeed, the types of collateral used to secure these forms of financing are illiquid, being private assets, which are hard to value. Or collateral can be portfolios of limited partner interests which involve hundreds of individual fund investments, which may be challenging to unwind.”

Benjamin added that a lack of transparency around the amount of leverage entering the system and private asset valuations creates material risks.

He also noted the increasing degree of interconnectedness in the market, between banks, private credit funds, private equity firms and limited partners.

“This intricate web of connections adds to the notable lack of transparency, making it difficult to assess financial stability risks,” he added.

Authorities globally have been raising concerns about the risks presented by the private credit and private equity markets.

Two US senators – Sherrod Brown and Jack Reed – wrote a letter last November to leaders at the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, asking if private credit could threaten the safety of the banking system.

And last December, the Bank of England said in its financial stability report that economic instability “could cause sharp revaluations of credit risk.”