​Prevalent in private equity, subscription credit facilities (SCF) funnel diverse sources of cash flow into a single financial instrument. They provide a ready way of capitalizing projects in complex alternative investment areas such as real estate, infrastructure, and M&A. Zac Barnett, co-founder of Fund Finance Partners, coauthored a 2025 paper for Mayer/Brown that looks at the impact of investor sovereign immunity on the terms of subscription facilities.

Frequent investors in SCF often enjoy some degree of sovereign immunity. These include state endowment funds, government pension plans, and other government-maintained investment instruments. As a result, they have certain immunity rights during adverse proceedings. Traditional common law states, “the King can do no wrong.” In modern terms, government is not suable in its own courts unless it has consented to waive its sovereign immunity.

If a governmental investor retains sovereign immunity and has not waived it, a lender may face limitations in enforcing capital commitments under a subscription credit facility. This possibility makes it important for lenders to evaluate whether each governmental investor has waived sovereign immunity in its contractual documents before extending credit.

It’s worth noting that sovereign immunity, while prevalent in the United States, has been eroded over time, particularly at the state level, with a majority of states permitting actions against the state, so long as contractual claims are the basis.

US governmental investors may waive sovereign immunity in one of three ways. The first is an express waiver, such as a side letter provision or other writing that clearly and specifically relinquishes immunity rights. The second is a statutory waiver, where a statute (like the Tucker Act) enacted by the applicable legislature waives immunity for certain contract claims in commercial transactions. The third is a judicial waiver, based on controlling case law from a federal or the highest state court, finding that sovereign immunity cannot be used as a defense for contractual claims.

From the lenders’ perspective, express written waivers from investors are ideal because they are specific to the transaction. Implicit written waivers, which might involve affirmative representations that the investor will comply with commercial law and the terms of the partnership and subscription agreements, are less robust because they do not directly address sovereign immunity.

The least strong written formulation involves “mitigating language,” which at least provides a degree of assurance that the government entity agrees to fund its capital contributions. It does not, however, preclude the investor from raising a sovereign immunity defense against a facility.

Written waivers are, in turn, preferable to statutory waivers. However, there are cases where states will not, or are unable to, provide a written waiver.

Many states have enacted statutes waiving sovereign immunity for commercial contract claims filed in the state’s courts. States such as New York and California explicitly recognize waivers of sovereign immunity for contractual claims under specific legislation. Nevertheless, such statutes often impose strict conditions, such as requiring claimants to demonstrate due authorization and execution of the contractual agreement by governmental investors, as well as compliance with procedural requirements relating to venue and statute of limitations.

The bottom line is that no two jurisdictions are alike, and laws are continuously evolving, which makes it imperative that lenders and funds evaluate government investors on a case-by-case basis, staying apprised of sovereign immunity risk.

​Fund sponsors and limited partners in investment firms provide financing to borrowers, comprising fund management firms and general partners. The financing offers several benefits, such as access to assured funds.

The fund sponsors, typically one or several high-net-worth individuals, credit providers, and financial institutions, provide funding for GPs who run the firm, including daily operations. The tasks include building investment portfolios, vetting borrowers, and managing the funds. In the arrangement, the general partner (GP) acts as both a manager and an investor, and ideally should be highly skilled in both roles.

However, GPs and fund firm managers may require additional funding from third parties to diversify investment portfolios or to pursue additional opportunities. For the fund to run smoothly and access continuous and assured credit, these GP and partner loan programs aid in pooling investments and optimizing returns on investment (ROI). The loans consist of term or revolving credit lines offered by a creditor for direct or indirect investment by the GP.

Access to assured funds is one of the primary benefits of GP loaning programs. Since the fund sponsors are typically multiple, the GP can acquire financing for diverse investments, thus increasing ROI with minimal risk. An ideal GP, under a fund sponsor, and a diverse portfolio provide a higher chance of ROI than most forms of investment due to a GP having higher managerial and investment skills and experience, and typically a diverse portfolio of high-value investments. Thus, creditors generally extend credit lines with favorable terms.

GP and partner loan programs are also flexible. Collateral and security for these loans often include pledges and the strong credit profiles of limited partners. When limited partners or fund sponsors actively participate in the investment, the GP benefits from their guarantees. The GP accesses funds through a security pledge, with repayments defined by a robust contract agreement among all parties.

Moreover, GP loans have highly controlled operational and restricted administration systems, which help avert some risks, including unauthorized access, and promote better fund management. The primary control systems include guarantees by the limited partners, withdrawals, and fund administration from multiple signatories. Established and reputable equity firms also typically consolidate the incoming financing in a few accounts as an additional assurance to financiers and fund sponsors of the effective use of the funding in accordance with the application.

Additionally, the consolidated account simplifies the process of multiple applications and loan administration for borrowers and secondary investors within the participating parties. Stringent contract agreements involved in GP financing include a prohibition on amendments to the initial contract without due consultation and agreement with all parties, a limitation on altering any agreed-upon submissions, such as management or repayment fees, and, in some cases, a minimum investment in assets to ensure continuous ROI. Thus, overall, GP and partner loans reduce the complexities of investment fund management.

A GP and partner loan program helps lenders diversify their credit line facilities. The highlighted robust relationship between the participating parties, alongside stringent control administration features and visibility into the flow of provided financing, exposes the lender to additional services provisions to the GP’s firms beyond the typical investment funding.

The extra options may provide lucrative lending ROI opportunities for the financier, like wealth management services for the fund's regular sponsors and management, or after-service facilities after the loan matures. The extra credit line, established through a rolling agreement, enables borrowers —whether individual parties or the fund management firm —to access financing for diverse needs with minimal application requirements, thanks to the long-term relationship.

​Fund financing refers to funding private funds for access to alternative markets and thus returns for conventional bank and non-bank lenders. Three primary funding sources exist: institutional investors, high-net-worth or retail individual investors, and financial institutions.

The primary function of fund financing is to significantly increase the investor’s capital plus optimize their experience to diversify revenue. It can depend on the value of pledged collateral or capital commitments guaranteed by the limited partners or fund sponsors, as well as projected returns, such as earnings from future investments, or current holdings, like corporate assets. 

One of the common financing sources for private equity firms is private and government entities. Institutional investors, including pension funds, sovereign wealth companies, and insurers, typically have a large pool of regular contributors, often for a long duration. For example, by 2025, approximately 185 million Americans will contribute to the Social Security Administration Fund, with a total of roughly $1.3 trillion collected in 2024. A significant percentage, over 90 percent, stems from employer-employee models, and self-employed contributions at 6.4 percent and 12 percent of wages, respectively. Considering the retirement age starts at 62 or older for the employed, this opens up a platform for ready investment funds for private equity firms.

However, due to the large number of contributors and the inherent risk in case of poor investment decisions, institutional investors tend to be highly stringent in funding fund financing - for fund administration transparency, and decision-making access and capability, the institutional investors in this arrangement act as limited partners, with the management firm as the general partners for administrative operations.

Secondly, high-net-worth individuals finance private equity firms. The individuals, called angel investors, may choose to invest in the private form directly or a set of portfolio investments packaged by the firm. The primary attractions for these individuals include high returns often achieved through a diverse portfolio and managerial experience offered by fund managers, as well as access to financing and entrepreneurial experience derived from their net-worth capacities.

Nonetheless, individuals should have a significant float as the investment amounts range between $5 and $10 million over a ten-plus-year period. Regulators have, over the years, noted the high potential of this resource pool and eased requirements and eligibility regulations for individual investors. For example, in 2020, the Securities and Exchange Commission (SEC) expanded the definition of eligible inventors to include not only high-net-worth individuals but also those with market-critical or specialized skills and knowledge. Individuals who have grown their wealth through entrepreneurship and executive experience sometimes prefer to work directly with general partners in the private equity firm for more hands-on engagement.

Thus, angel investors can benefit the fund firms beyond financial support through managerial and other skilled attributes. In addition to expanding the investments available in fund financing beyond traditional institutional investors in the niche, it also opens the market for retail investors to benefit from the perks of private equity investment.

Lastly, credit and financial institutions, as well as commercial finance firms, engage in fund financing. The common methods include direct investment, debt financing, and term or revolving credit lines. These financing options, however, work best for lenders with significant, diverse customer bases and deposits, as well as assured cash flow, such as government and large private banks and lenders. However, compared to the other two financing options, bank-funded models can finance operations beyond investing in other private equity firm financial obligations, like administration or expansion, and services like foreign exchange.

Debt financing generally does not involve any ownership stake or investment, but focuses on clearing existing credit, especially with other creditors, or enabling the fund to meet operational costs. In addition to providing complete control over operations and decision-making to the equity firm, it is also tax-deductible, thus serving as a cost-saving avenue for the firm.

​Fund finance is a type of lending that provides credit directly to private market funds. It supplements the capital that investors commit and gives managers flexibility to invest or manage cash flows. There are two primary forms: subscription line loans backed by investor commitments and net asset value (NAV) loans backed by the fund’s portfolio.

Private funds operate through partnerships where a general partner (GP) invests and limited partners (LPs) pledge money. LPs do not hand over their full commitment up front. Instead, they send money when they find a deal. This structure creates cash flow gaps because commitments are drawn down over several years, leaving both managers and investors facing illiquidity. Credit facilities exist to bridge those gaps and keep the fund functioning smoothly.

A subscription line facility is usually the first credit line a new fund secures. It uses uncalled investor commitments as collateral and lets managers complete transactions quickly without repeatedly asking investors for cash. These loans are short-term and diversify credit risk across many investors. Lenders view them as low-risk because the pledges are binding and serve as first-ranking collateral. Although lenders set limits on how long borrowings can remain outstanding, these lines provide early liquidity and can improve investment timing.

NAV-based loans become important later in the fund’s life. Instead of relying on investor commitments, they are secured through cash flows and distributions from the underlying investments. Lenders carefully select which assets to lend against and set covenants governing the collateral pool. The loan-to-value (LTV) ratio is typically 10 percent to 30 percent, reflecting a risk and reliance on portfolio performance. Such loans can finance add-on investments or restructuring, extend investment horizons, return capital early to investors, or support portfolio companies.

There are also hybrid facilities. These combine subscription line and NAV features. Uncalled commitments and portfolio assets back them, and these can stay with the fund throughout its life. This blended structure reduces the need to negotiate separate facilities but costs more due to its complexity.

Notably, the market’s growth ties back to broad shifts in finance. After the 2008 financial crisis, tight regulations forced banks out of risky lending. At the same time, investors poured trillions of dollars into private markets seeking risk-adjusted returns. Funds needed credit to deploy capital efficiently, and supply has not always kept pace, especially after recent bank failures.

Consequently, high loan margins now reward lenders for providing these facilities, while GPs diversify their lender base to spread counterparty risk. Because subscription lines are floating-rate instruments, they offer yields above other short-dated assets and can boost portfolio returns.

Additionally, fund finance benefits all parties involved when used responsibly. For managers, subscription lines provide certainty and flexibility to fund acquisitions without waiting for capital calls. They allow GPs to batch requests, reducing administrative strain and enabling investors to plan their liquidity.

For investors, there are high returns because they no longer need to hold idle cash for unpredictable calls, and lenders view these facilities as a way to diversify their portfolios at relatively low risk. Investing in subscription line loans can enhance diversification and risk-adjusted returns, while banks can cross-sell other services, such as treasury or foreign exchange, to fund clients.

The biggest challenges in fund finance stem from data management. Lenders receive information from multiple sources in inconsistent formats. Without clear data, they cannot assess exposures – the potential risk or reward associated with an investment – or monitor risk effectively. A subscription line might appear diversified, yet exposures can overlap across facilities, leading to concentration.

Furthermore, the one-to-many relationships between lenders and the underlying collateral add complexity because risk sits with investors or portfolio assets rather than just the borrowing counterparty. Traditional systems struggle with these nuances, making purpose-built tools for data aggregation and borrowing base calculations essential. Therefore, as the market continues to expand, careful risk management and tailored systems will be vital to ensure fund finance remains a reliable tool for private funds and their partners.

​NAV financing allows private equity funds to borrow money by using the net asset value (NAV) of their existing investments as collateral, rather than depending on fresh capital commitments from investors. A private equity fund’s NAV is calculated by subtracting its liabilities from the total value of its assets. These assets could include real estate, shares in private or public companies, or intellectual property owned by the fund.

Take, for instance, a private equity fund that holds a portfolio of promising artificial intelligence, renewable energy, and FinTech companies, valued at $500 million, with outstanding liabilities of $200 million. Its net asset value would be $300 million.

Importantly, NAV loans are not based on the full value of a fund’s portfolio. Lenders apply a discount to account for the fact that these assets can be illiquid and may also lose some of their value. Typically, a fund can borrow about 20 percent to 30 percent of its NAV. This conservative loan-to-value approach protects lenders by ensuring they're not overexposed if the value of the fund’s assets falls or if the assets take longer to liquidate than expected.

NAV financing is highly attractive to private equity funds because it provides what’s known as non-dilutive capital. Instead of selling stakes in portfolio companies or raising new investor money, the fund can access cash without giving up ownership. This allows managers to back new investments, support existing portfolio companies with growth initiatives or acquisitions, or deliver early returns to investors without being forced into premature asset sales.

Accessing capital through NAV financing can also be faster and more flexible than selling interests in the secondary market, where finding buyers and negotiating deals can take months and potentially lower the value extracted from the sale.

From the lender’s perspective, NAV loans offer a relatively secure way to generate attractive returns. The loans are backed by a pool of underlying companies, often diversified across industries, which reduces concentration risk. Before lending, institutions rigorously review the fund’s holdings to assess quality, performance trends, and resilience. If the fund defaults, the lender usually has rights to seize or claim proceeds from the portfolio assets to recover its investment, creating a built-in layer of protection.

The repayment structure of NAV loans gives lenders first priority. When the fund eventually sells its portfolio holdings, the lender is paid back first - along with accrued interest - before any profits are distributed to the fund’s investors. This senior position in the capital structure is a major reason why lenders are comfortable offering NAV loans against private and less liquid assets.

Loan terms can vary depending on the portfolio’s risk profile, but most NAV loans mature over a medium-term horizon, typically between three and five years. Interest rates are generally higher than traditional corporate loans, reflecting the relative illiquidity of the underlying assets and the complexity of valuing them over time.

Several types of institutions provide NAV loans today. Private credit funds, specialty finance firms, and investment banks with structured finance divisions are all active in this space. Some of the most notable participants include Fund Finance Partners, Hark Capital, and 17Capital, each with specialized experience in analyzing private fund portfolios and structuring financing solutions that balance flexibility for the borrower with strong protections for the lender.

​In 2023, 25 fund managers raised 41 percent of the capital, revealing the increased demand for private equity, private credit, and other financing vehicles and illustrating the demand for alternative methods for raising capital. Some of this fundraising happens through financing, such as general partner (GP) debt financing through various debt structures, which offers multiple benefits.

GPs raise funds by securing capital from a lender, such as a banking institution or other investors. The debt structure consists of one loan to the GP or multiple loans disbursed to those directly involved with the GP or fund manager, where the fund manager guarantees individual loans.

Moreover, GP debt financing can include lines of credit, which enable the GP to pay for expenses and manage the portfolio, company, or asset. They can obtain a management fee line of credit designed specifically for GPs to pay management fees related to the fund's operational costs. Then, net asset value (NAV) debt enables the GP to borrow based on the value of the fund's assets. An unencumbered asset pool uses assets without liens, restrictions, or financial obligations as collateral against the loan.

Additionally, fund managers might rely on capital calls, which involve asking investors to commit to investing more capital to bridge the gap between the money needed and current contributions. GPs can also borrow through partner loan programs, which involves individual partners within a GP borrowing from one another to meet their capital commitments. Finally, GPs can use debt to finance investments by combining NAV with capital calls.

This financing strategy has emerged in investing circles for a few reasons. With inflation and other economic factors, experts state that GPs must raise more money to meet commitments. More importantly, as opportunities to invest in potentially lucrative companies arise, GPs must tap into alternative investment vehicles to meet these financing needs or miss out on investments that could generate large sums for investors.

Regardless of the approach to using debt to finance an investment, GP debt financing gives those GPs access to capital, which is a primary benefit. This access prevents them from having to commit their funds. Furthermore, GP debt financing enables GPs to hold onto their share of investment and raise funds, which they cannot do in equity investing. Additionally, GPs can customize funds to align with the companies’ cash flow, distributions, and portfolio exits when the investors stop investing in a company, whether through asset sale, raising shares through initial public offering, liquidation, or management buyout.

Customizing the fund ensures that the money used to repay the debt is enough to cover the liquid assets. It allows GPs to explore other ways of strategically creating growth, whether through a company, succession planning, or expanding the fund's services. Finally, GPs benefit from tax-deductible interest payments.

While this approach to GP debt financing is flexible and offers several benefits, it also comes with a few caveats. GPs intensify losses if their investments perform poorly because of GP leverage (the amount borrowed to manage the fund). GPs also risk interest rate hikes and loss of credibility.

Furthermore, GPs might find their ability to tap into capital strained because repayment obligations create a situation where assets are not liquid. Illiquidity creates a situation where GPs cannot access funding for other investments. High fund fees combined with interest payments can erode returns made from the investment. In some states and countries, GPs face stringent compliance regulations that can interfere with obtaining financing through a debt vehicle. Finally, if the fund's returns are under pressure, this impact might create friction between the limited partners and fund managers.

​Net asset value (NAV) loans provide private equity managers with portfolio-based financing, with assets as collateral. This financing enables managers to access liquidity without selling valuable holdings at a discount in the secondary market. NAV loans are evaluated against a specialized benchmark index tailored to this specific loan type.

The NAV loan index (NLI) helps private managers observe and analyze NAV loan market trends, offering insight into borrower utilization patterns, lending agreement structures, and other relevant market data. This enhanced transparency equips fund managers, lenders, investors, and stakeholders with the analytical foundation to develop strategies tailored to their unique needs based on several aspects.

Market participants can use the NLI for benchmarking. Lenders such as banks can gauge their loan portfolios against sector standards, identifying opportunities to adjust loan terms, interest rates, and other loan parameters to align with market dynamics. Concurrently, NLI allows private equity borrowers to evaluate their NAV loan performance, comparing terms and repayment approaches to pursue favorable terms.

Fund Finance Partners, a debt advisory firm renowned for its expertise in fund financing, released the first iteration of NLI. This periodically updated report includes data from lenders on NAV loans extended to buyout firms (firms that buy other companies). With approximately 1,000 data points, the report represents the broader market, estimated at $150 billion and involving 75 to 100 active lenders.

The new NLI provides valuable and fresh insights into the buyout-focused NAV loan market. Analysis reveals conservative lending practices and a focus on growth-oriented loan usage. Data shows most loans maintain low-risk profiles, with loan-to-value (LTV) ratios at or below 20 percent, meaning the loan is a small percentage of the total value of investments used as collateral. Usage patterns also show nearly all borrowers channel loans toward future expansion initiatives and operational needs. Only a marginal segment allocates NAV proceeds toward investor distributions.

The report also shows how safe these loans are for lenders and what happens if borrowers can’t repay. Insights on borrowers emphasize a prudent lending environment and lender confidence in loan issuing, given prudent capital deployment. Notably, lender assessments of borrower creditworthiness have improved, reflecting heightened confidence. Lenders also have strong protections and can recover their money easily. Two-thirds of the loans are backed by the money the borrower expects to earn as collateral, and not physical assets. This approach reduces default risk because it means small amounts are borrowed compared to the value of the business.

Even with surging demand for NAV loans, the new index reveals lenders maintain strict underwriting standards. Before issuing loans, lenders thoroughly assess borrowers, focusing on adequate portfolio diversification across a judicious number of assets. This discernment manifests in allocation patterns, with 40 percent of NAV facilities extended to borrowers managing portfolios of 11 to 15 assets.

Insights from the new NLI enable prediction of the NAV loan market. According to the report, the market will likely expand in the years ahead, driven by new regulations and shifting market conditions. Industry players anticipate that the impending Basel III accords (international banking regulations developed for banking supervision), effective mid-2025, will tighten the subscription credit line market, making NAV loans more attractive for funds. Additionally, more lenders – for example, banks and insurers - are entering the market, drawn by the security of cash flow-backed loans.

Limited partners (LPs) are re-evaluating and adjusting their investment strategies in response to this shift. The New Mexico State Investment Council (NMSIC) exemplifies this trend - it has increased venture capital allocations and added more VC managers to increase private equity commitments. This approach mirrors the broader institutional shift toward mid-market buyouts. Investor confidence is also rising, with many planning to boost VC fund commitments in the near term.

​The emergence of new alternative asset management firms and sustained growth profiles among many existing firms have impelled fund sponsors to provide innovative financing solutions. General partner (GP) and co-investment financing support the continued expansion of managed businesses and provide needed liquidity.

Such vehicles extend lending beyond traditional net asset value (NAV) finance and subscription credit facilities. The latter types of alternative investment arrangements are later stage and help shore up capital call commitments among private equity fund investors, ensuring sufficient operating capital.

GP financing offers general partners and individual members of GPs ways to finance capital contribution obligations through outside loans. Lenders gain stakes in the fund and future distribution rights as securities. Funds that service GP debt are typically derived through income the fund itself generates, through value gains. Such loans may be structured either as loans to the GP entity or as multiple loans to individuals associated with the fund manager or GP. This creates a way of boosting investment capital for the fund, while aligning GP and limited partner (LP) interests, since all parties commit capital to the fund.

Co-investment vehicles are similar except the financing goes directly to participants instead of the general partner and its partners, via a sponsor-affiliated vehicle or management company expressly set up for that purpose. As with GP financing, these programs enable individual borrowers to finance 50 percent to 70 percent of required capital contributions through loans.

​A rated note feeder fund structure allows the issuer to offer debt and equity interests to insurance company investors. Typically, these structures feature at least one tranche of debt supported by a residual tranche of unrated equity capital. This support can be provided through a feeder fund or as an obligation of the main fund.

One of the primary advantages for insurance investors is the treatment of the debt tranches under bond-risk-based capital (RBC) standards, along with the long maturity period (usually a minimum of 10 years) associated with most rated note structures.

These rated note structures are primarily used in senior secured, direct lending strategies. Still, they are increasingly applied to alternative credit strategies such as royalties, non-traditional asset-based lending, and real estate debt. These approaches also aim to optimize RBC treatment for investors.

Equity tranches may be required to maintain minimum cash collateral, which can be fulfilled through actual cash or a letter of credit. Additionally, sponsors might agree to minimum collateralization or lifetime value tests, potentially redirecting all portfolio proceeds to the most senior tranches. Maintaining minimum cash reserves for debt service can also enhance credit.

​According to PitchBook’s 2022 Global Private Debt Report, private debt funds raised $200.4 billion. These figures have positioned private debt investment as a growing investment niche. Private debt or private credit describes any debt that private businesses or individuals may have accumulated. These debts are considered private because the loans are inaccessible via public markets.

In private debt investing, the investor provides credit to a private organization in consideration of interests and principal payments at maturity. Private debt investments share similarities with private equity investments in that both have extended lockup times with illiquid investments; however, both are different in their fundraising methods. For instance, private debt managers seek institutional investors like family offices, pension funds, and university endowments. Sometimes, high-net-worth individuals also invest in private debt.

Private debt is important because it gives businesses or private individuals access to credit outside the heavily regulated and limited lending options that banks make available. For example, although banks will not offer credit to a private institution with negative earnings before interest, taxes, depreciation, and amortization (EBITDA), an average private debt lender will offer such credit.