A fund is usually described as a machine that gathers money from investors and puts it into assets. In practice there is almost always a bank standing between an LP's commitment and the cash landing in a portfolio company's account. Fund finance — lending at the level of the fund itself rather than its portfolio companies — has become a market in its own right over the past fifteen years: Haynes Boone (2026) puts its size at $1.25–1.75 trillion, with more than two thirds of that in subscription lines.
For an LP this is not an abstraction. Fund-level debt changes two things a family office regards as its own: the return as it arrives in the report, and the risk the investor actually signed up for. They move in different directions and for different reasons, which is why they have to be taken facility by facility. One rule runs through all of it: the closer the collateral sits to the assets, the more expensive the money and the more risk genuinely shifts onto the investor.
Why a fund borrows at all
A closed-end fund holds no cash: LP capital exists as uncalled commitments — an obligation to wire money when the GP asks. When a deal has to close inside a week and a standard capital call gives the investor 10–20 business days to fund, a gap opens. The first function of fund finance is to close it. From there the functions multiply: fewer capital calls, follow-on funding after the investment period has ended, an early distribution to LPs before an exit. Each successive use sits further from plumbing and closer to economics — and that is where the arguments start.
A fund may borrow only where the LPA expressly permits it, together with the right to pledge the capital call right itself. LPA mechanics typically cap the size of the debt, its tenor and its purpose, but older documents were drafted more loosely than their authors intended — much of the current debate rests on exactly that.
Subscription line: secured on promises, not assets
A subscription line (capital call facility) is a revolver secured not on the fund's assets but on LPs' unfunded commitments and the GP's right to call them. The collateral is the right to issue a capital call, the right to receive the proceeds, and the account they land in. The portfolio is not part of the security package.
The consequence is that creditworthiness is assessed on the LP base, not the portfolio. The borrowing base is built by investor category with different advance rates. A typical construction, per Mayer Brown: included investors at 90% of their uncalled commitment, designated investors (weaker credit) at 65%, with concentration limits stripping out excess exposure to any single investor — say 15% and 10% of total uncalled respectively.
Investors do not stay in the base permanently. Exclusion events, per Cadwalader: insolvency, failure to fund a capital call when due, a rating falling below threshold, sanctions, withdrawal from the fund. Excluding an LP shrinks the facility immediately. The practical conclusion: the quality of the LP base is the price of the fund's debt. A pool of pension and sovereign wealth funds gets a cheaper line than the same fund assembled from private investors through a feeder.
The argument about IRR
A subscription line pushes to the right the moment an LP actually parts with money. IRR is sensitive to dates; MOIC and TVPI are not. With deal economics unchanged, reported IRR rises while the multiple does not — strictly, it slips slightly, because the fund pays the interest.
Albertus and Denes (2019) give the order of magnitude: funds using subscription lines report IRRs on average 6.1 percentage points higher than the same cash flows without the line — a 25% uplift on the sample mean, rising to 9.7 points for younger funds. TVPI meanwhile falls by 0.4%. That asymmetry is the whole complaint: the metric used to sell the next fund goes up; the metric that counts the money does not.
The second layer is carried interest. The hurdle is calculated as an annual return on called capital, so by deferring the call the line compresses both the base and the accrual period for the preferred return, and the GP clears the threshold sooner. The dispute is not only about the shop window.
The industry's answer has been disclosure. In 2017 ILPA proposed parameters: no more than 180 days continuously outstanding, no more than 15–25% of total uncalled capital, and advance rates set against uncalled commitments rather than a fixed share of NAV. A disclosure standard followed in 2020: quarterly, the facility size and balance, the share of each LP's unfunded commitment financed, the average days outstanding per drawdown, and net IRR with and without the facility; annually, the facility terms, rate, fees, collateral base and use of proceeds.
An important caveat: these are recommendations from an investor association, not regulation. The 180 days and 15–25% are 2017 parameters; the 2020 document cites them without re-endorsing them as binding. They make it into an LPA only to the extent LPs managed to negotiate them in.
NAV facility: secured on the portfolio itself
A NAV facility is the mirror image: the collateral is the equity in portfolio companies, the rights to proceeds from them and the accounts those proceeds flow into, usually through a dedicated SPV in a neutral jurisdiction, from the Cayman Islands to Luxembourg. LTV is modest: Oaktree cites 5–30% against 35–60% for typical middle-market direct lending, while industry surveys more often quote 10–25%. The low ceiling reflects illiquid collateral and uncertain valuation.
NAV debt is taken for three things: to fund follow-ons into portfolio companies, including once capital calls are no longer available; to refinance more expensive asset-level debt; and, most contentiously, to fund an early distribution to LPs. On Fund Finance Association figures cited by ILPA, roughly 80% of NAV facilities support the portfolio and 20% fund distributions.
The post-2022 surge is mechanical. Rates rose, the exit window shut, and distributions to investors fell to record lows. A fund that cannot sell an asset but has to return something finds a third route — borrow against the portfolio. Oaktree puts 2023 NAV financing volume at roughly $44 billion, more than double 2020, with projections to $145 billion by 2030 — and that is still only about 2% of private equity AUM.
LP objections come down to three. Risk stops being tied to a specific deal: the lender is secured on the whole portfolio, so trouble at one company drags the healthy ones with it — cross-collateralisation. A distribution funded by debt is not a result but an advance: DPI and IRR rise, while the cash is usually recallable. And there is the conflict of interest — a facility that flatters metrics in the middle of the next fundraise benefits the GP whether or not it benefits investors.
ILPA published its NAV facilities guidance on 25 July 2024. The core of it: where the LPA does not expressly permit such a facility, the GP should obtain LPAC consent before putting it in place regardless of the use of proceeds; and where any part of the proceeds will fund a distribution, LPAC consent is recommended in any event. Recommended disclosure covers the rationale and use of proceeds, size, SPV structure, pricing, LTV at origination, covenants, the effect on total fund leverage and, separately, whether distributions will be recallable.
Hybrids, GP lines and preferred equity
A hybrid facility carries dual collateral — both uncalled commitments and NAV: the instrument of a fund's middle life, when part of the capital has been called and part has not.
GP and management company lines are a separate storey. The borrower is not the fund but the manager or GP entity, and the security is future management fees and carry, or the GP's interest in the fund itself. The money funds the manager's operating costs, the GP commitment, and buyouts of departing partners; covenants are tied to AUM and fee income. This is not neutral for LPs: if carry is pledged and the team breaks up, a lender acquires an interest in the fund's fate that the original structure never contemplated. And there is a conflict — a GP borrowing against future carry has a stake in that carry materialising.
Preferred equity is the economic twin of NAV debt without being debt in law. The investor enters the capital stack senior to common equity but junior to debt, and takes priority distributions: a fixed return or a multiple, cash or PIK. It has none of a creditor's rights — no security, no acceleration. The point of the structure is that preferred equity is not counted as debt and therefore works where LPA borrowing limits are already exhausted. The uncomfortable conclusion for LPs: formal compliance with a debt limit guarantees nothing on its own.
Facility
Collateral
Purpose
Principal LP risk
Subscription line
uncalled commitments, capital call right
bridging deals, fewer calls
inflated IRR, hurdle cleared early
NAV facility
portfolio assets and proceeds from them
follow-ons, refinancing, early distributions
cross-collateralisation, advance not result
Hybrid
both commitments and NAV
mid-life of the fund
both risk profiles combined
GP / management company
future fees and carry
manager costs, GP commitment
key-person risk, conflict of interest
Preferred equity
distribution priority, no security
liquidity around borrowing limits
LPA limit circumvented
What breaks, and when
An LP default on a capital call is, for the fund, a dedicated LPA section: default interest, dilution, forced transfer. For the lender it raises two questions. First, is there an overcall right — the ability to call the shortfall from the remaining investors — and what caps it; the standard limit is the lesser of that LP's uncalled commitment and a fixed percentage. Second, does the defaulting investor drop out of the borrowing base — it does, and the facility shrinks at once. The side effect for a performing LP is obvious: somebody else's default turns into a demand on them. Lenders also read side letters, which may prohibit pledging a particular investor's commitment, while government-linked institutions sometimes reserve sovereign immunity.
The 2023 banking crisis was a lesson in provider dependence. SVB, Signature and First Republic were present in the subscription line market, but on Fitch's assessment their share was smaller than that of the larger players; more significant was that big banks had already begun trimming exposure — capital requirement changes from 2022 led Citi to withdraw its offering as early as late 2022. The result was tighter supply and shorter tenors: on Haynes Boone data, average tenor fell from roughly 25 months in H1 2022 to roughly 17 months in H1 2024. Non-bank lenders filled the space — private credit, insurers and structured vehicles.
LP checklist
What to establish before signing the subscription agreement, not after.
The LPA borrowing limit — as a percentage of commitments and separately of NAV; whether tenor is capped.
Days outstanding on the subscription line — whether there is any ceiling on continuous use.
Net IRR disclosed with and without the facility — whether it is required, how often, and on what methodology.
LPAC consent for a NAV facility — whether it is needed at all, and separately for debt-funded distributions.
Whether debt-funded distributions are recallable.
Any GP or management company line against future fees and carry — whether one exists and whether it is disclosed.
The composition of the LP base — it drives both the price of the facility and the stability of the borrowing base.
Overcall — whether the right exists and what caps it.
Fund finance works in the LP's favour where it stays plumbing: fewer capital calls, a more predictable family treasury, faster closings — all of which feed straight into the liquidity horizon set out in the family's investment policy statement. It works against the LP where it becomes economics: return flattered, hurdle cleared early, risk induced at portfolio level, and distributions that will have to go back.