The fund finance market
surpassed $1 trillion in size this year, driven by demand from
the growing private credit market, according to a new Moody’s
Ratings report.
Once an early-stage liquidity option for private funds, the
fund finance market has become a “critical backstop” for private
credit lenders as they have opened more funds in recent years,
Moody’s analysts wrote.
Private credit funds have also become key players both as
borrower and lender in net asset value (NAV) loans, which are
backed by a fund’s underlying investments, Moody’s noted. NAV
facilities offer longer tenors and more flexible underwriting,
offering higher returns in exchange for the greater risk tied to
the underlying loan investments.
The fund finance market has also seen a growth in hybrid
structures that are secured by both NAV and investor
commitments.
The Moody’s analysts raised concerns about the recent AI
disruption of software companies, and the subsequent elevated
investor withdrawals from private credit funds invested in
software businesses.
“Asset quality in US direct lending is weakening, and
growing disruption from artificial intelligence is introducing
additional stress, particularly on software companies,” the
analysts wrote.
Moody’s also highlighted the exposure of these NAV
facilities to payment-in-kind (PIK) loans, which allow borrowers
to defer interest payments and instead increase the principal
due at maturity.
“As private market fund investors are becoming more
accepting of fund-level leverage, the rise of private credit and
fund finance are mutually reinforcing,” the report’s authors
wrote.
“As the market expands, however, it has become essential for
private credit fund managers to maintain prudent underwriting
discipline and to rigorously stress-test leverage-on-leverage
structures,” they added.
Banks, which also lend NAV facilities, have begun bundling
these loans into asset-backed securities to transfer risk and
tap capital markets to deepen the investor base for these loans,
the report noted.
Published on April 28, 2026
