“Fund finance” is one of those institutional terms that gets used constantly and explained rarely: the lending market built around investment funds — not what funds invest in, but how funds themselves borrow. It has quietly become a very large corner of banking, and understanding its three main instruments explains a surprising amount of modern private-markets behavior.
Subscription credit facilities: borrowing against promises
The workhorse. A private fund’s investors commit capital but deliver it only when called; a subscription line lets the fund borrow from a bank against those uncalled commitments, secured by the right to call them. The practical use is speed and smoothing — close a deal now, call capital later, batch capital calls quarterly. The controversial use is IRR management: delaying calls flatters the internal rate of return that headline performance is quoted on, which is why sophisticated LPs now ask for returns with and without the line’s effect.
NAV lending: borrowing against what the fund already owns
Later in a fund’s life, commitments are spent — so lending shifts to the portfolio itself: credit secured by the net asset value of the fund’s holdings. NAV facilities fund follow-on investments, bridge distributions to investors, or support portfolio companies without raising new equity. They boomed when exit markets slowed, and they carry the debate you would expect: leverage on illiquid marks is efficient right up until the marks are questioned.
GP-side finance: the manager borrows too
The third leg finances the managers themselves — GP commitment loans (so partners can fund their own slice of the fund), management-company credit lines, and increasingly GP-stake structures where minority investors buy into the management company’s fee stream outright. This is the part of fund finance that explains how first-time managers afford the GP commitment that anchors credibility with LPs — a cost our starting-a-hedge-fund guide covers from the founder’s side.
Why it matters beyond the banks
Fund finance is now infrastructure: it changes when investors’ cash is actually drawn, how performance optics are produced, and how long funds can hold assets without selling. Anyone reading private-fund returns, negotiating LP terms, or analyzing a manager is reading numbers that fund finance has already shaped.