A bank is almost always involved in funding, from the LP's commitment to the receipt of cash 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.
Fund-level debt changes reported returns and the risk the investor accepted. They move in different directions and for different reasons depending on the facility. The closer the collateral is to the assets, the more expensive the financing and the more risk genuinely shifts onto the investor.
Reasons for fund-level borrowing
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. Other purposes include fewer capital calls, follow-on funding after the investment period has ended, an early distribution to LPs before an exit. Successive uses concern operational matters less and fund economics more, which gives rise to disputes.
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 — that wording is central to much of the current debate.
Subscription line: secured on uncalled commitments
A subscription line (capital call facility) is a revolver secured 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 can be excluded from the borrowing base. 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 immediately reduces the facility limit. The quality of the LP base determines the cost 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 defers the LP's contribution. IRR is sensitive to dates; MOIC and TVPI are not. With deal economics unchanged, reported IRR rises while the multiple does not — more precisely, it falls 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%. Hence the LP complaint: the line inflates precisely the metric used to raise capital for the next fund.
The second effect concerns 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 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.
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 are incorporated into an LPA only to the extent LPs have negotiated their inclusion.
NAV facility: secured on the portfolio itself
A NAV facility uses different collateral: 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 LTV reflects illiquid collateral and uncertain valuation.
The subscription line is secured on the capital call right, while the NAV facility is secured on portfolio equity held through an SPV.
NAV debt serves three purposes: 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 growth after 2022 reflects market conditions. Rates rose, exits became unavailable, and distributions to investors fell to record lows. A fund that cannot sell an asset but has to make a distribution borrows 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 also affects financially sound companies — cross-collateralisation. A distribution funded by debt is, in effect, an advance: DPI and IRR rise, while the cash is usually recallable. And there is the conflict of interest — a facility that improves reported metrics during 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: an instrument used at an intermediate stage of the fund's life, when part of the capital has been called and part has not.
GP and management company lines are a separate form of financing. 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 future 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 an economic analogue 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. Preferred equity is not counted as debt and therefore works where LPA borrowing limits are already exhausted. 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 |
LP defaults and dependence on the lender
An LP default on a capital call is governed by a dedicated LPA section: default interest, dilution, forced transfer. For the lender, the existence and scope of an overcall right — the ability to call the shortfall from the remaining investors — are important; the standard limit is the lesser of that LP's uncalled commitment and a fixed percentage. The defaulting investor drops out of the borrowing base, and the facility limit falls immediately. As a result, another investor's default leads to a demand on a performing LP. 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 demonstrated dependence on lenders. 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.
What the fund documents settle
Before the subscription agreement is signed, eight parameters decide how much of the fund's debt reaches the investor; the terms are set out in the LPA, in the side letters and in what the GP has undertaken to disclose.
| Parameter | What it settles |
|---|---|
| LPA borrowing limit | A percentage of commitments and separately of NAV; whether tenor is capped |
| Days outstanding | Whether continuous use of the subscription line has any ceiling |
| Net IRR without the facility | Whether disclosure is required, how often, and on what methodology |
| LPAC consent, NAV facility | Whether it is needed at all, and separately for debt-funded distributions |
| Recallability | Whether distributions funded by debt have to go back |
| GP or management company line | Whether one exists against future fees and carry, and whether it is disclosed |
| Composition of the LP base | The price of the facility and the stability of the borrowing base |
| Overcall | Whether the right exists and what caps it |
Fund finance benefits LPs through operational improvements: 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. Adverse consequences for LPs include inflated reported returns, earlier achievement of the hurdle rate, additional portfolio-level risk, and distributions that must be returned.
Q/A
Does a subscription line cancel an LP’s capital commitment?
No. The facility only defers the capital call: its collateral consists of uncalled LP commitments and the fund’s right to call them. The investor remains obliged to fund a valid call under the LPA, including one used to repay the line, and the fund documents govern default.
Why can a subscription line increase the fund’s IRR?
Because borrowing delays the LP’s negative cash flow and shortens the measured period before a distribution. That can raise IRR without changing the exit value; interest and fees reduce the financial result, so ILPA recommends reporting performance both with and without the facility.
Can a GP borrow against commitments if the LPA is silent?
There is no universal power: the LPA and side letters determine authority, limits, tenor, collateral and permitted uses. ILPA recommends defining those parameters and disclosing the facility’s size, cost, days outstanding, use of proceeds and performance impact.
Can a NAV facility fund a distribution without LPAC approval?
ILPA recommends LPAC approval for a distribution funded by a NAV facility even where the LPA permits that facility. This is industry guidance, not legislation: legal authority still turns on the LPA, the GP’s powers, conflicts and the terms of the particular transaction.
Is a debt-funded distribution necessarily final?
No. Recallability depends on the LPA, the distribution notice and the facility terms; payment alone does not prove that the money is non-recallable. ILPA recommends separately disclosing whether LPs may have to return it, as well as the facility’s cost, collateral, purpose and leverage effect.