The evolution of Fund Finance: navigating market dislocation and embracing innovation
The fund finance landscape has undergone a remarkable transformation over the past 15 years, evolving from a niche financing solution to an industry-accepted liquidity tool that has proven its resilience across market cycles.
From subscription financing to NAV lending to General Partner (GP) borrowing, fund finance has ballooned into a significant market that an increasing number of private markets managers are turning to.
At a recent roundtable hosted by the Citco group of companies (Citco) and moderated by Jon Whiteaker – Editor from The Drawdown – our panelists from Apollo and Cadwalader, Wickersham & Taft LLP, examined the current state of this dynamic sector, with several key trends emerging that are reshaping how alternative asset managers approach capital deployment and liquidity management.
Market dislocation as a catalyst for growth
Fund finance has enjoyed a secular tailwind as alternative private assets funds have grown dramatically since the Great Financial Crisis. More recently, a challenging exit environment, difficult fundraising conditions, and elevated real long-term interest rates have collectively forced firms to explore alternative liquidity solutions. This dislocation has not merely been reactive; it has fundamentally altered how managers view fund finance as a strategic tool rather than a temporary liquidity fix.
Historically, the alternative funds market has maintained steady growth of 12-15% annually, with fund finance outpacing this growth, primarily driven by the gradually increased adoption of subscription lines. However, recent economic pressures have broadened adoption to a wider spectrum of products, across asset classes. Firms that previously viewed fund finance with skepticism have discovered that these tools can unlock liquidity when traditional sources become constrained, leading to a more nuanced understanding of their strategic value.
The rise of hybrid solutions
Perhaps no trend has been more significant than the legitimization of NAV lending. Initially met with considerable skepticism, including criticism from some LPs and negative coverage in the media, NAV financing has emerged as a recognized long-term solution rather than a short-term market aberration. This shift in perception reflects an evolving market where participants better understand the inevitable trade-offs and appropriate use cases for different financing structures.
The evolution toward hybrid facilities represents a particularly important development. These structures enable more tailored solutions that can adapt to specific asset maturity profiles and investor needs. This flexibility has proven especially valuable as managers seek to optimize their capital structures across different market conditions.
Innovation through cross-asset class expertise
The application of cross-asset knowledge and expertise has allowed lenders to create bespoke solutions. Non-bank lenders have emerged as key drivers of this innovation, offering flexibility that traditional banking relationships may not provide – yet one that is complementary. Their willingness to adapt products to specific asset characteristics and investment strategies has expanded the toolkit available to fund managers, creating opportunities for more efficient capital deployment.
Market participants: the "Natives" versus "Tourists" dynamic
Our panelists drew a critical distinction between different types of market participants. "Tourist" lenders – those who have entered the market opportunistically due to favorable conditions – contrast sharply with "native" participants who maintain consistent market presence across cycles. This differentiation has become increasingly important as fund managers seek reliable, long-term financing partnerships rather than transactional relationships.
Native lenders, exemplified by firms such as Citco – who have been active since the 1990s and maintained their commitment to the market during events like the financial crisis and COVID-19 pandemic – offer continuity and deep market expertise that proves valuable during periods of stress. Their sustained presence provides confidence to fund managers who require reliable access to liquidity across different market environments.
Emerging trends and future outlook
Thanks to broader market acceptance, fund finance has grown significantly, with diverse funding sources emerging to satisfy the scale of demand. The entry of insurance and pension capital in greater volumes is expanding available liquidity sources, while participants emphasize responsible deployment practices.
The wider perception of NAV lending also continues to evolve positively, with initial skepticism from institutional investors giving way to recognition of its role as a complementary tool alongside traditional banking relationships. This acceptance is facilitating more sophisticated capital structure optimization across fund portfolios.
Looking toward 2026 and beyond, several factors suggest continued market evolution. There is anticipation of increased IPO and M&A activity, which will create additional liquidity for funds and their LPs. The rise of open-ended funds is expanding beyond infrastructure into private equity and credit strategies, reflecting the growing demand by investors for liquidity in private markets.
Balancing opportunity with risk management
Amid these positive trends, market participants have broadly maintained appropriate discipline with respect to underwriting credit risks thus far. Nonetheless, while current market conditions appear stable, there remains awareness of potential vulnerabilities that could emerge.
For example, pricing across the credit spectrum – including investment grade, high yield, structured and private credit – continues to show exuberance that may not fully reflect broader economic fundamentals.
These risks must continue to be managed as the market grows, and that is why partnering with experts is important.
An innovative future
Fund finance providers have innovated and broadened their capabilities in response to their clients’ challenges and demands. As market participants become more sophisticated in their approach to these products, the focus has shifted from simple liquidity provision to value-added structuring and long-term partnership development. This evolution positions Fund Finance as an integral component of modern alternative asset management, capable of supporting growth and providing stability across varying market conditions.
The continued innovation in structures, combined with expanding participant bases and improving market acceptance, suggests that fund finance will remain a dynamic and growing sector, adapting to meet the evolving needs of alternative asset managers in an increasingly complex global financial environment.